Shares of discount carrier Spirit Airlines (NYSE:SAVE) suffered a heavy blow in the market on Tuesday due to a courtroom drama that could disrupt its merger with JetBlue Airways (NASDAQ:JBLU). Lawyers for the latter airliner urged a federal judge to reject the Department of Justice’s efforts to block the deal. As a result, SAVE stock may represent a binary proposition that has caused anxiety among investors.
According to a Reuters article, JetBlue attorney Ryan Shores at the conclusion of a closely watched trial in federal court in Boston argued that the proposed business combination symbolized a consumer-friendly arrangement. Further, the attorney stressed that the deal created a “viable, disruptive national challenge to the industry’s dominant airlines.”
Notably, JetBlue’s legal team stated that the four largest U.S. carriers — United Airlines (NASDAQ:UAL), American Airlines (NASDAQ:AAL), Delta Air Lines (NYSE:DAL) and Southwest Airlines (NYSE:LUV) — controlled 80% of the domestic market. In sharp contrast, Spirit and JetBlue combined only control about 8%.
However, on the other side of the table, the DOJ argues that the merger would diminish competition. In particular, consumers would lose access to Spirit’s ultra-low-cost, no-frills service. Subsequently, the loss of this disruptive business model would cause airline fares to increase and flight quantity to decrease.
Still, JetBlue attorneys contend that the devastation of the Covid-19 pandemic imposed a disproportionately onerous impact on smaller airliners, thus collectively hurting their ability to compete.
Traders Don’t Seem Optimistic About SAVE Stock
Notably, per Reuters, JetBlue attempted to ease antitrust concerns by agreeing to key divestures; specifically, it would sell Spirit’s gates and slots at certain airports in New York City, Boston, Newark and Fort Lauderdale. Unfortunately for bullish speculators of SAVE stock, the DOJ stated that the offered divestures are not enough.
Further, the agency stated that if JetBlue acquires Spirit, passengers collectively will absorb about a $1 billion negative net impact due to the aforementioned fare increases and flight number decreases. With convincing arguments on both sides, SAVE stock hangs in the balance. Interestingly, court observers told Seeking Alpha that the judge asked for briefs from the two parties’ legal teams by Dec. 13.
Further, the investment resource stated that the deal spread undergirding SAVE stock still remains very wide. Some traders specializing in mergers and acquisitions anticipate upside to $26 should the merger go through as planned. However, others see a dramatic decline to $6 a share if the outcome is unfavorable.
According to The Washington Post, JetBlue outbid Frontier (NASDAQ:ULCC) to merge with Spirit. Ultimately, the winning offer translated to a buyout proposal of $33.50 per share, valuing the deal at $3.8 billion. However, when accounting for Spirit’s debt, JetBlue states that the valuation rises to $7.6 billion.
It’s worth noting that on Monday and Tuesday, options flow data shows institutional traders largely engaging transactions that on face value carry a pessimistic angle; namely bought puts and sold calls.
Why It Matters
Within the past three months, covering analysts peg SAVE stock as a consensus hold. Frankly, the assessment lacks any discernible measure of confidence, breaking down as four holds, one sell and zero buys. Overall, the average price target sits at $13.20, implying over 5% downside risk from the time of writing.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
