JetBlue Airways Corp (JBLU.O) is nearing a deal to buy Spirit Airlines (SAVE.N) that could be announced as soon as Thursday, a source familiar with the matter said, after Spirit canceled its $2.7 billion sale to Frontier Group Holdings (ULCC.O).
The latest developments mark a victory for JetBlue in its months-long battle for the ultra-low-cost carrier, though the potential combination is expected to kick off a fight with antitrust regulators, who have already sued to block JetBlue’s alliance with American Airlines (AAL.O).
A combination of JetBlue and Spirit would create the fifth-largest U.S. airline and be the most consequential U.S. airline industry merger since Alaska Air Group (ALK.N) bought Virgin America Inc for $2.6 billion in 2016.
JetBlue is offering terms similar to what it had proposed earlier, the source said. In June, JetBlue had offered $33.50 per share for Spirit, or roughly $3.7 billion, and a breakup fee of $400 million.
It will also keep its Northeast Alliance (NEA) partnership with American but is expected to announce minor route divestitures to ease antitrust concerns, according to the source.
The Wall Street Journal first reported the potential agreement between JetBlue and Spirit.
Both JetBlue and Spirit did not respond to Reuters requests for comment outside regular business hours.
The source spoke on condition that they are not identified ahead of an official announcement of the agreement.
Earlier on Wednesday, Spirit canceled its sale to Frontier after failing to convince shareholders about its merits.
That development, first reported by Reuters, came after Spirit pushed back a shareholder vote on the Frontier deal four times, hoping it could muster enough support. Spirit had earlier argued that antitrust regulators were unlikely to clear JetBlue’s $3.7 billion bid.
The outcome was a setback for Frontier and its chairman Bill Franke, who was instrumental in kicking off talks between the sides last year. Franke’s airline-focused buyout firm, Indigo Partners, is a major shareholder in Frontier.
“While we are disappointed that Spirit Airlines shareholders failed to recognize the value and consumer potential inherent in our proposed combination, the Frontier board took a disciplined approach,” Franke said in a statement.
JetBlue sees Spirit as an opportunity to expand its domestic footprint at a time when the U.S. airline industry is dogged by labor and aircraft shortages.
“We are pleased that the merger agreement with Frontier has been terminated and we are engaged in ongoing discussions with Spirit toward a consensual agreement as soon as possible,” JetBlue said in a statement.
But Spirit also could choose to remain independent.
The airline has expressed concern about JetBlue’s partnership with American. The U.S. Justice Department filed an antitrust lawsuit against American and JetBlue in September seeking to end the alliance, saying it would lead to higher fares in busy airports in the U.S. Northeast.
JetBlue has refused to pull out of the alliance and instead offered sweeteners like a higher breakup fee and route divestments.
Frontier shares rose 6.4% to close at $11.27 on Wednesday as investors expressed relief that the company exited what had become a bidding war for Spirit. Spirit shares rose 4% to $24.30, while JetBlue shares rose 3.6% to $8.35.
With the end of the proposed Spirit-Frontier tie-up, Spirit will pay Frontier $25 million for merger-related costs that it incurred. As per the terms of the deal, Spirit would owe Frontier an additional $69 million if it ends up striking a merger deal with JetBlue or any other competitor within the next 12 months.
“Now that Spirit Airlines has terminated the Frontier merger agreement, we hope that Frontier management will put aside its merger distraction and invest the same amount of resources and focus to improving conditions at their own airline,” said the Frontier pilots’ union, which is a subset of the Air Line Pilots Association (ALPA).