Archive for category: In the News

By DAVID LYONS | South Florida Sun Sentinel

November 26, 2024

When Spirit Airlines filed its Chapter 11 bankruptcy petition in New York last week, one of its top executives offered the court a note of optimism.

The troubled South Florida-based airline, said Fred Cromer, an executive vice president and chief financial officer in a court declaration, was entering its financial overhaul process “with an eye towards continuing to deliver low-cost, high-quality service to its loyal customers, and to do so for years to come.”

The question is, does the pioneering discounter have enough time to transform its service profile from a maverick bare-bones carrier to a more upscale airline?

On approach to one of the busiest Thanksgiving travel seasons in memory, Spirit flew as usual last week after filing a “prearranged” Chapter 11 bankruptcy petition designed to quickly reduce a large chunk of debt in a restructuring deal with lenders that calls for the creditors to take $350 million in newly created equity in the airline. They’re also lending Spirit a fresh $300 million to finance operations during the Chapter 11 process.

The lender deal became bad news for existing shareholders, whose stock will be canceled when the airline expects to exit bankruptcy at some point in March. Between now and then, U.S. Bankruptcy Judge Sean H. Lane and a lender-
dominated creditors committee will be co-piloting the airline.

Here is where Spirit stood less than a week after it filed its Chapter 11 petition on Nov. 18:

• Operating Cash: The judge signed an array of orders that allows Spirit to pay routine operating expenses ranging from employee salaries and fuel bills to a small army of vendors and airport landlords.
• The Stock: As promised by management, Spirit’s battered common stock was delisted from the New York Stock Exchange, with trading moved to the over-the-counter market. Now the shares are acting as a penny stock (symbol SAVEQ), changing hands at 15 cents a share Friday. Before the delisting, the 52-week high for the stock (symbol SAVE) exceeded $17 with the low at $1.08.
• Retention Bonuses: Six days before the Chapter 11, the Spirit board authorized $5.4 million in retention bonuses to five upper echelon executives led by CEO and president Ted Christie, who would receive $3.8 million, according to a regulatory filing. Companies typically use such bonuses to keep critical leadership in place during stressful times, according to compensation specialists. Christie, who joined the company in 2012 as chief finance officer, has piloted Spirit through a number of challenges: Spirit’s rough-hewn customer relations, COVID-19, two ill- fated merger/takeover attempts by Frontier Airlines and JetBlue Airways, a manufacturer’s engine recall that is grounding multiple aircraft, debt restructuring talks, and the Chapter 11 bankruptcy filing.
• Airbus Sales: The bankruptcy court apparently is taking a look at a proposed pre-bankruptcy deal where Spirit agreed to sell 23 Airbus jetliners to the Fort Lauderdale-based aviation firm GA Telesis. A hearing is scheduled for next week, according to the court docket. Asked whether it anticipates that the deal will be approved, a GA Telesis spokesperson said: “YES — We have full intention as does Spirit to continue with the transaction as documented.”

Spirit did not immediately respond to emailed questions about the stock, retention bonuses, aircraft deal and whether travelers might be booking away from the airline.

Bondholders in control

As outlined by Cromer in his declaration to the court, approximately $1.635 billion of outstanding funded debt would be restructured and the company’s total funded debt would decline by approximately $795 million with the lenders collectively receiving $840 million in secured notes and new common stock in the reorganized company. The lenders are, in effect, holding most of the cards, analysts say.

The airline is emphasizing a “business as usual” posture, stating that employees, vendors, landlords and anyone else doing business with the company will be paid on time during the Chapter 11 proceedings while the airline flies the schedule it laid out for the fourth quarter of this year. It currently serves more than 80 destinations in the U.S., Latin America and Caribbean.

“In sum,” Cromer wrote, “Spirit seeks to implement a financial restructuring that positions it for future stability, growth, and success without impacting its vendors or other commercial counterparties and without interrupting its ability to serve its guests during the Chapter 11.”

As of the Chapter 11 filing, Spirit employed approximately 12,800 “direct employees,” approximately 84% of them unionized. They include approximately 3,400 pilots, 5,800 flight attendants, 740 aircraft maintenance technicians, 400 ramp service employees, 330 customer service agents, and 100 flight dispatchers. Their labor agreements would remain intact. The airline contracts out work to nearly 10,000 other workers.

Encroachment by rival airlines

After evolving from a trucking company into a charter airline in Michigan in 1990, Spirit relocated to South Florida in Miramar in 1999 and started operating as an “ultra low-cost carrier” offering customers rock bottom “unbundled” base fares. If they wanted anything else such as checked baggage, seat assignments, priority boarding, refreshments, or Wi-Fi, they would pay for those services a la carte. Spirit used those low fares “to address underserved markets, which helps it to increase passenger volume and load factors on the flights it operates,” Cromer noted in his court declaration.

The business went well until COVID-19 all but grounded the industry in 2020, a year that saw most of the industry seek financial aid from the U.S. Government.

“As the seventh largest carrier in the United States, Spirit was not immune to the macroeconomic effects of the COVID-19 pandemic, an oversupplied domestic market, and larger rivals who have capitalized on premium and cost- conscious travelers alike,” Cromer wrote in his court declaration. “In the post- pandemic period, the U.S. airline industry has seen material change as a result of shifting customer demand and operating headwinds.”

“Business travel through 2023 had not fully returned to pre-COVID volumes,” Cromer added, and “premium leisure demand soared which, in combination with unbundled fare competition,” allowed carriers such as Delta and Southwest to “compete for an even greater portion of basic economy share” held by ultra low-cost carriers such as Spirit.

The airline has cut back its route network as it has sought to slash costs ahead of the Chapter 11 filing. Other airlines including discounters Frontier and Allegiant Air have since added routes in and around Spirit’s traditional Florida airspace. In the meantime, the so-called “Big Four” carriers that dominate 80% of the U.S. market — Delta Air Lines, American Airlines, United Airlines and Southwest Airlines — have been offering their own economy fares.

In a note to investors, Raymond James analyst Savanthi Syth wrote that Spirit’s capacity cuts for November and December along routes that overlapped with other carriers largely benefited Frontier, JetBlue and Minneapolis-based Sun Country, with lesser traffic gains by Alaska Airlines and Southwest.

Project Bravo

In a bid to drive more revenue, Spirit hopes to attract new customers with an upscale program of newly tiered fares and services unveiled over the summer. Dubbed in the court filing as part of a strategic overhaul called “Project Bravo,” the company has new premium offerings for customers that became available in August. They included four new travel options called “Go Big,” “Go Comfy,” “Go Savvy,” and “Go,” the latter of which is the airline’s original base fare category.

In effect, the more passengers pay, the more options they’d receive including free Wi-Fi, cabin baggage, snacks and drinks, “all with the flexibility of no change or cancel fees,” Cromer wrote.

Spirit would also add larger overhead bins and introduce premium cabins with access to free streaming Wi-Fi. People holding premium tickets would have dedicated wait lines at some airports; overall, the airline would seek to simplify boarding zones in its terminals.

The airline is already realigning its route system, dropping less profitable destinations in favor of so-called “top value seeker” cities.

The airline would also renew its focus at Fort Lauderdale-Hollywood International Airport, where it stands No. 1 in passengers carried. More “focus cities” would be added in early 2026 where management thinks it could exercise more pricing power.

But bigger airlines such as Delta think they’re dealing with a better hand than discounters when it comes to premium services. On an investor call, Delta President Glen Hauenstein took an indirect shot at Spirit, saying larger carriers with premium products “had a little bit of a downdraft” after the pandemic versus airlines focused on price.

“I think we’ve seen that manifest itself in the bankruptcy we saw filed this week,” he said.

Another takeover play?

Cromer in his declaration acknowledged that Spirit had renewed merger talks with Frontier before the bankruptcy filing, but they went nowhere.

“Over the last few months, the Company and Frontier restarted negotiations around a possible merger transaction,” he wrote. “In recent weeks, certain members of the Ad Hoc Groups were made aware of such discussions as well. Those discussions were discontinued and are no longer ongoing.”

Frontier has declined comment.

Earlier this year, after a Boston federal judge killed a proposed $3.8 billion takeover of Spirit by JetBlue Airways on antitrust grounds, the company’s stock value plunged by 60%, Cromer said. It was an event that triggered management’s effort to start exploring all of its financial options, while simultaneously figuring out how to drive new business.

Henry Harteveldt, founder and president of Atmosphere Research, a San Francisco-based consulting firm, said another round of buyout talks during the bankruptcy case is not out of the question.

“Nothing is stopping Frontier, or, for that matter, any other airline, from opening discussions,” he said.

“Another option,” Harteveldt said, is that other airlines could ask Spirit about acquiring other planes, airport gates or landing slots, or even pilot training facilities.

The outcome

Whether a Spirit Airlines with a lighter debt load and new marketing strategy will emerge from Chapter 11 equipped to become profitable remains to be seen. Joseph “Joey” Smith, an investment banker and aviation specialist at Cassel Salpeter & Co. in Miami, believes the carrier’s history as an industry disrupter will be an important asset going forward.

“How they’ve been operating to date looks like they are really trying to shake things up again,” Smith said. “And I give them credit for that. I have admiration for somebody who is being true to their founding DNA. I think it will be interesting.”

This article has been updated to include the full attribution for the Cassel Salpeter
& Co. aviation specialist.

Originally Published: November 25, 2024 at 5:00 AM EST

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By DAVID LYONS | South Florida Sun Sentinel

November 3, 2024 at 4:00 AM EST

One would think that less than a month before Thanksgiving, and two months before the Christmas-New Year’s holiday season, this is not an ideal time for news pages to be filled with reports about an airline’s possible bankruptcy filing, or renewed takeover talk by an old suitor, or a spate of layoffs looming in January.

But the public discussion is one of the realities facing South Florida-based Spirit Airlines as the carrier’s management labors to raise cash and plot a course to return to profitability amid fierce industry competition.

Travelers have choices when they book trips for the year’s busiest travel seasons. As Spirit alters its route network, sells airplanes, cuts capacity and arranges hundreds of furloughs as part of an $80 million cost-cutting program, customers would like to know whether they will be facing changes in their plans.

“I think Spirit is going to do everything possible to minimize disruptions to its customers for the holidays,” said Henry Hartveldt, founder and president of Atmosphere Research Group, an industry consultancy in San Francisco. “One challenge Spirit faces is unfortunately there is a lot of bad news swarming around the airline, and that inspires concern among travelers.”

Spirit, which publicly acknowledged Thursday another round of 330 furloughs among its pilot ranks planned for January, was less clear when asked if the airline plans any route changes that might impact the forthcoming holidays, and whether customers would be notified in advance.

“We don’t have any route adjustments to share at this time,” a spokesman replied by email.

In 2023, Spirit was the leader in passengers carried at Fort Lauderdale- Hollywood International Airport, whose annual report placed the discount airline’s share at 29%, or more than 9.8 million travelers using the Broward County airport. JetBlue Airways was second at 20% and Southwest Airlines third at 14%.

“We are a month away from Thanksgiving,” Harteveldt said. “I don’t think we are going to see Spirit make any major changes to the Thanksgiving schedule. If bookings are strong enough I expect the airline will fly the flights scheduled for the Christmas and New Year’s period as well.”

Ivan Reich, a lawyer who lives in West Palm Beach, said he remains a fan of Spirit for its low prices. Asked if he’d continue to fly with the airline amid its turmoil, he replied, “most likely.”

“If you’re flying the next two or three weeks, it’s still the best deal,” he said. “The price difference between Spirit and everybody else is a lot. And you get to fly nonstop, which is the other thing.

“Will I keep an eye on the news? Of course,” he added. “I’m presuming between now and January they will be fine.”

Capacity reductions

Of late, the airline has engaged in substantial scheduling adjustments, and in a regulatory filing it forecast year over-year capacity reductions of 20% in the fourth quarter and in the “mid teens” for the entirety of 2025. The reductions are partly attributable to the sale of 23 Airbus jetliners, which will be removed from its fleet.

Late last month, The Points Guy, the travel website for airline passengers, reported Spirit had cut 32 routes, many in the West. The site also noted seven routes were dropped from Logan International Airport in Boston. Only one route was cut from Fort Lauderdale — to Salt Lake City.

Clint Henderson, managing editor at The Points Guy, said he doubts any further reductions are in the offing until at least January because the airline already has instituted deep cuts.

“If I had a flight booked for the holidays I would not be worried at all,” he said.

“Hopefully passengers have already been notified and have made alternate arrangements for the holidays,” he added, speaking of flights that have been removed from the schedule.

Specific figures for the third quarter are hard to come by as Spirit has yet to report its quarterly results, saying it will do so in mid-November, well after its peers. In the second quarter, Spirit posted a net loss of $192.9 million. The airline hasn’t posted a net profit since before COVID-19.

Spirit’s shift into downsize mode came after a variety of setbacks for the airline, starting with a federal judge’s rejection of Spirit’s proposed $3.8 billion takeover by New York-based JetBlue Airways on antitrust grounds. JetBlue,
which has had its own financial losing streak, is also in the midst of a campaign to make money again.

The proposed takeover by JetBlue would have meant the end of Spirit as an independent carrier. A previously proposed merger with Frontier collapsed in the face of JetBlue’s offer.

Once the merger and takeover offers went off the table, Spirit was left to fend for itself.

One immediate major problem — beyond its control — involves a manufacturer’s recall of Pratt & Whitney engines that forced Spirit to ground aircraft to allow for an extended program of inspections. Although Spirit has worked out a compensation program that runs into the millions to account for the business losses, the aircraft groundings created a major disruption in its operations.

Heavy debts spawn bankruptcy talk

Earlier this year, Spirit CEO and President Ted Christie, who has labored long and hard to upgrade the airline’s brand and reputation — the latest being a revised menu of more fare and service options for customers — publicly bristled at analyst predictions that a bankruptcy filing might be the only way to relieve the company of its financial pressures.

The company line has been that it prefers to renegotiate its debt obligations without the help of a bankruptcy court and the controlled supervision it provides.

But industry analysts have wondered if the approach can be sustained under pressure from lenders who are owed up to $3.3 billion.

“Spirit fully unveiled its standalone plan with a (still low-cost) premium and passenger-friendly offering that should reinvigorate the brand,” Raymond James analyst Savanthi Syth said in a note to investors. “However, we see risk in the patience of Spirit’s creditors to fund an uphill marketing battle …”

Cash is king, and the airline has spent a number of months building a war chest.

“They have to figure out how to get enough cash liquidity to get to the finish line,” said Joseph Luzinski, senior managing director of DSI, a financial advisory firm in Miami and Fort Lauderdale.

By the end of the year, the company has said in a regulatory filing, it expects to have roughly $1.1 billion in liquidity, in large part on the strength of its recent sale of 23 Airbus jetliners. It also borrowed $300 million from a credit line.

“I think what they’ve done is going to get them through the first quarter of next year,” said Joseph Smith, an investment banker specializing in aviation at Cassell Salpeter & Co. in Miami. “They’ve raised enough cash selling these birds.”

The company has not commented on a more recent Wall Street Journal report that it discussed a Chapter 11 bankruptcy scenario with its bondholders, and that it renewed merger talks with rival discounter Frontier Airlines in the context of a possible asset acquisition through bankruptcy.

The Denver-based airline has declined comment.

If a bankruptcy filing does occur, Spirit would likely continue flying, but under a court’s supervision. “Even if the worst case happens, consumers are still pretty protected when a U.S. carrier declares bankruptcy because it keeps operating,” Henderson said.

It remains unclear how the airline will ultimately fix its finances as it deals with creditors behind the scenes.

“Often these things are on a parallel track,” Luzinski said. “We’re going to file for bankruptcy and blow everybody out. Or as a negotiating ploy you say, ‘if we make a deal we file and get exactly what you want out of this transaction.’”

Whither the discounters?

Whatever happens, customers such as Ivan Reich would like to see the airline preserved. Without discount carriers, he suggested, consumer choices will be narrowed to legacy carriers such as Delta Air Lines, which charge higher prices.

“I like the cheap flights,” Reich said. “If you are going to go away for a weekend and throw everything in an overnight bag, you can’t beat it.”

“Look at the Spirit prices compared to everybody else and there is a substantial difference,” he added. “Where are you going to find bargains? What happens to the marketplace where all you have is the legacy carriers?”

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September 6, 2024
By Demitri Diakantonis

There’s the annual summer deal lull, then there’s the flat cycle as dealmakers wait for interest rates to pick up and for the results of the November elections. Still though, there’s nothing positive about the latest numbers, as August deal volume was the worst in three years, according to data supplied by LSEG. Here’s our monthly deal analysis.

There were just 44 mid-market deals in August, the lowest monthly tally year to date and worst since August 2021. Deal value came in at around $19 billion, the second lowest total this year after February’s $16.4 billion output.

Investors are saying deal activity will pick up, eventually. But when that happens, don’t expect the winners to come out of the gate right away, as sponsors are desperate to return liquidity to their LPs, while waiting to get top value for their most prized assets.

“Most of what I think will come out from a lot of sponsors in the next three to nine months are what I call the B-assets,” says Oaktree Capital Managing Director Matt Wilson. “These are not top-tier portfolio companies, but assets that need to be sold to extract whatever returns sponsors can get so they can return capital and raise the next fund. These are probably the most price sensitive assets to interest rates, hence the reason they haven’t had a bid over the last 18-24 months.

“Right now, for a lot of sponsors, it’s about ‘We haven’t sold much in the last two years and we have to return capital to retain our clients and raise the next fund. Let’s try to sell our second-tier assets, get what we can for them so we can return the capital, and keep our real gems, the assets we will make the most money on in 2025 when we have more clarity on rates,” he adds.

Looking at specific sectors, the top two industry staples-technology is down
significantly, while healthcare is still down slightly year-over-year. In other sectors, real estate, consumer products and services are down. On the other end of the spectrum, consumer staples and industrials are on the rise.
Other notable deals that closed last month include:

• Quest Diagnostics‘ (NYSE: DGX) $987 million deal for laboratory test company LifeLabs
• Bank of Nova Scotia’s (NYSE: BNS) minority investment in regional bank KeyCorp (NYSE: KEY)
• Gallatin Point Capital’s minority investment in commercial bank Israel Discount Bank of New York

In the league tables, JP Morgan (NYSE: JPM), Goldman Sachs (NYSE: GS) and Morgan Stanley hold the top three spots in terms of number of deals (34, 29 and 22, respectively) and deal volume (about $16.4 billion, $16.2 billion and $10.6 billion, respectively). A couple of other banks made big jumps into the top 10. Wells Fargo (NYSE: WFC) went from 22nd to eighth place and Moelis (NYSE: MC) went from 18th to ninth place.

“I believe we will see an uptick in mid-market M&A during the last four months of the year,” says James Cassel, co-founder of Miami-based investment bank Cassel Salpeter & Co. “There is a robust pipeline of deals that were preparing to go to market as well as pent up demand on the buy side for companies and PE firms to deploy capital.”

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16th July 2024
By Katishi Maake, Brian Yue, Marlene Star and Manu Rajput

Consumer merger and acquisition volume saw a 46% year-over-year increase in 1H24 to USD 31.95bn, and buyout volumes crept up from 1H23, according to Mergermarket data. As concerns over a recession have waned over the past year, dealmakers have become slightly optimistic but cautiously so.

The top global deal is Macy’s [NYSE:M] pending 91.24% stake sale to Arkhouse Partners and Brigade Capital Management for USD 6.249bn, based on a cash offer price of USD 24 per share, which values Macy’s at USD 12.076bn, including net debt. Arkhouse Partners and Brigade Capital Management reportedly increased their offer to acquire the department store chain earlier this month to USD 24.80 per share, roughly USD 6.9bn, according to the Wall Street Journal.

Other major North American transactions include the USD 4.6bn merger of Primo Water Corporation [NYSE:PRMW, TSX:PRMW] and BlueTrion Brands, and Walmart’s [NYSE:WMT] USD 2.3bn acquisition of television maker Vizio.

The first half of the year saw buyout volumes of USD 1.6bn, compared to USD 1.05bn in 1H23. In May, Brightstar Capital Partners agreed to acquire Nevada-based slot machine maker PlayAGS in a USD 1.1 bn deal that’s expected to close in the latter half of 2025. Deal valuations totaled USD 1.48 bn across 19 deals during 1H24, according to Mergermarket data. Sector advisers hope the increased activity will continue in 2H24, but that will be highly dependent on inflation and how the Federal Reserve acts on interest rates.

Beauty and pet products a bright spot
The consumer sector’s perennial strong areas – pet, beauty and consumer services – continued to perform well in 1H24. Pet and beauty continue to be active as investors see continued growth in the space, according to Richard Kestenbaum, co-founder and partner at Triangle Capital.

“We wind up selling companies that identified a way to make great money and be successful in industries that were often tired,” Kestenbaum says. “It’s both industries that are growing and consolidating but it’s also innovation in existing spaces.”

Conversely, sub-sectors such as durables, apparel, hard goods, furniture, and discretionary items are not performing as well due to tighter consumer budgets, Christopher Petrossian, managing director at Lincoln International says.

Restaurants are likely to see restructuring-driven deals in 2H24 as food and labor costs continue to climb, particularly in California where the minimum wage for restaurants rose to USD 20 per hour in April, says Jim Cassel, chairman and co-founder of Cassel Salpeter & Co. These pricing pressures under already small margins have restaurants looking to sell, Cassel says, adding that potential changes in tax laws around capital gains might also lead to the sale of troubled assets.

In CPG, there’s been a lot of activity redeploying cash and selling assets with the intent of assessing where the market will be over the next decade, Andrew Dickow, managing director at Greenwich Capital Group, says. Unilever’s [LON:ULVR] sale of Ben & Jerry’s is exemplary of this, as the company attempts to transition from food and beverage to consumer products.

Food and beverage – a lack of appetite
The food and beverage sector contributed about USD 9.5bn of deal value on 118 deals announced in 1H24, according to Mergermarket data. The largest deal was a still-pending USD 4.6m merger between Primo Water Corporation [NYSE:PRMW, TSX:PRMW] and BlueTrion Brands.

The sector has continued to see significant declines in deal volume compared to pre-pandemic levels.

The macro outlook for food and beverage M&A has been weak since 2021, with deal volume continuing to drop due to a decline in VC funding and the creation of new startups, according to Michael Zakkour, managing director at SellSide Group.

“There were probably too many [startups] at one point, and this is just a natural correction where deal flow is lower because there just simply aren’t as many potential new targets coming online,” Zakkour says.

Consumer preferences are shifting towards discretionary spending on experiences over products, which Zakkour notes could lead to a resurgence in deal flow for health and wellness products and quick service restaurants offering unique experiences.

The continued low number of PE and VC exits in food and beverage compared to pre-pandemic levels is due to increasing consumer acquisition costs and how crowded the sector is, Zakkour says. However, that could change in the next 1 or 2 years as investors better understand how data in e-commerce affects the products brought to market and put on shelves, he adds.

A wait-and-see game with the economy
Consumer M&A activity in 2HQ2 will be largely defined by the larger macroeconomic trends affecting consumer spending and borrowing for transactions.

While there is plenty of available debt for deal, particularly on the private debt side, high interest rates have made it difficult for buyers to borrow funds, Petrossian says. Once the Federal Reserve begins to cut rates, more capital will be available, leading to more M&A activity, he says.

Inflation is also a mitigating factor for deals getting done, Petrossian says. One private equity firm told him that 70% of its 2023 deals that came to market failed due to concerns surrounding inflation and consumer spending and sentiment.

Lincoln International’s approach has been to sit and wait on its backlog of consumer deals until market conditions improve, he says. The firm will reassess its pipeline after Labor Day in case it wants to close deals before the end of the year. Alternatively, it may wait until 1Q25 after the Federal Reserve cuts interest rates and the presidential election is decided, Petrossian says. “Forecasting this year’s fourth quarter and being in the middle of a deal and missing your budget is not a good thing to process,” Petrossian says. “At a certain point, it might make sense to
close Q4, see what it looks like, and go in on a deal early next year.”

A recession, in theory, would be devastating to consumer M&A activity, but Triangle Capital’s Kestenbaum says that’s much less of a concern now compared to inflationary pressures. “The market hates surprises and it wants to see good news, and it wants to be told good news is coming,” he adds.

By Katishi Maake, Brian Yue and Marlene Star, with analytics by Manu Rajput

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