Spirit Airlines Shareholders Urged to Reject Frontier Deal by Proxy-Advisory Firm

Spirit in February agreed to be acquired by Frontier in a cash-and-stock transaction originally valued at $2.9 billion, a deal that would combine the two budget carriers. JetBlue later emerged with a $3.6 billion cash offer to absorb Spirit’s discount operation into its own.

Either combination would create the fifth-largest U.S. airline, and both Frontier and JetBlue have argued that their proposals are better for consumers. But Spirit has stuck by Frontier, arguing that it doesn’t believe antitrust regulators would sign off on a merger with JetBlue.

ISS said Spirit might have a point that a merger with Frontier Group Holdings Inc. would have an easier time gaining regulatory approval. But the firm said it didn’t find sufficient evidence that JetBlue’s proposal has no chance, as Spirit has suggested, and said both deals face some degree of regulatory risk.

“Despite the confidence expressed by the Frontier/Spirit camp, that deal offers shareholders zero assurance in the event of termination,” ISS wrote. “In the absence of a superior guarantee from Frontier, [Spirit] shareholders appear better off rejecting the proposed transaction at this time, as a signal to the board to engage more productively with JetBlue.”

ISS said JetBlue’s offer to pay Spirit a $200 million fee if regulators block the deal—a reverse termination fee—gave that deal an edge over Frontier’s offer, which doesn’t include such a guarantee.

“Given the regulatory risk inherent in both proposals, [Spirit] shareholders should favor whichever deal provides greater certainty in the event of regulatory rejection,” ISS said.

JetBlue shares were down 0.3% to $10.81 in afternoon trading, while Spirit shares rose 2.5% to $21 and Frontier shares rose 2.1% to $10.68, with U.S. stock indexes little changed.

JetBlue Chief Executive

Robin Hayes

applauded the ISS recommendation. “The ISS report highlights the flawed process that the conflicted Spirit board followed, which only underscores the need for Spirit’s board to now come to the table and negotiate—this time in good faith—with JetBlue,” Mr. Hayes said.

Frontier didn’t respond to requests for comment. Spirit didn’t have an immediate comment.

Some airline analysts have been more skeptical of JetBlue’s chances of being able to pull off a deal, though they have said either combination could face pushback from regulators.

Spirit has argued previously that JetBlue’s proposed $200 million breakup fee isn’t high enough to compensate investors for the 18 to 24 months they could spend waiting for a deal to close. Spirit executives have also said they believe that JetBlue’s true aim is to break up the Frontier deal.

JetBlue has countered that it is serious about acquiring Spirit in hopes of creating a more formidable competitor to the bigger airlines that dominate the industry in the U.S. JetBlue has argued that Spirit has refused to engage seriously with JetBlue’s offer and hyped the regulatory risks.

JetBlue earlier this month went directly to Spirit shareholders, launching a tender offer to buy their shares at $30 apiece in an effort to pressure Spirit’s management to come back to the table and negotiate.

Spirit shareholders are slated to vote on the Frontier deal in a special meeting on June 10.

ISS said JetBlue’s offer is superior from a financial standpoint, although it is “clearly a defensive offer that may also prove to be opportunistic,” given that Spirit shares traded above JetBlue’s original offer of $33 a share for a period last year.

The Spirit board’s view that a merger with Frontier would pay off for “patient investors” over the long term could prove to be correct, ISS said. Still, the firm said that taking the JetBlue deal provided more options for Spirit investors worried about risks that have emerged in the industry in recent months.

ISS also said Spirit’s decision to forgo an auction process gave it concern, “since investors lack market-based evidence that the deal presented in fact represents the best available alternative, as evidenced by the competing offer from JetBlue.”

Write to Alison Sider at alison.sider@wsj.com

Spirit in February agreed to be acquired by Frontier in a cash-and-stock transaction originally valued at $2.9 billion, a deal that would combine the two budget carriers. JetBlue later emerged with a $3.6 billion cash offer to absorb Spirit’s discount operation into its own.

Either combination would create the fifth-largest U.S. airline, and both Frontier and JetBlue have argued that their proposals are better for consumers. But Spirit has stuck by Frontier, arguing that it doesn’t believe antitrust regulators would sign off on a merger with JetBlue.

ISS said Spirit might have a point that a merger with Frontier Group Holdings Inc. would have an easier time gaining regulatory approval. But the firm said it didn’t find sufficient evidence that JetBlue’s proposal has no chance, as Spirit has suggested, and said both deals face some degree of regulatory risk.

“Despite the confidence expressed by the Frontier/Spirit camp, that deal offers shareholders zero assurance in the event of termination,” ISS wrote. “In the absence of a superior guarantee from Frontier, [Spirit] shareholders appear better off rejecting the proposed transaction at this time, as a signal to the board to engage more productively with JetBlue.”

ISS said JetBlue’s offer to pay Spirit a $200 million fee if regulators block the deal—a reverse termination fee—gave that deal an edge over Frontier’s offer, which doesn’t include such a guarantee.

“Given the regulatory risk inherent in both proposals, [Spirit] shareholders should favor whichever deal provides greater certainty in the event of regulatory rejection,” ISS said.

JetBlue shares were down 0.3% to $10.81 in afternoon trading, while Spirit shares rose 2.5% to $21 and Frontier shares rose 2.1% to $10.68, with U.S. stock indexes little changed.

JetBlue Chief Executive

Robin Hayes

applauded the ISS recommendation. “The ISS report highlights the flawed process that the conflicted Spirit board followed, which only underscores the need for Spirit’s board to now come to the table and negotiate—this time in good faith—with JetBlue,” Mr. Hayes said.

Frontier didn’t respond to requests for comment. Spirit didn’t have an immediate comment.

Some airline analysts have been more skeptical of JetBlue’s chances of being able to pull off a deal, though they have said either combination could face pushback from regulators.

Spirit has argued previously that JetBlue’s proposed $200 million breakup fee isn’t high enough to compensate investors for the 18 to 24 months they could spend waiting for a deal to close. Spirit executives have also said they believe that JetBlue’s true aim is to break up the Frontier deal.

JetBlue has countered that it is serious about acquiring Spirit in hopes of creating a more formidable competitor to the bigger airlines that dominate the industry in the U.S. JetBlue has argued that Spirit has refused to engage seriously with JetBlue’s offer and hyped the regulatory risks.

JetBlue earlier this month went directly to Spirit shareholders, launching a tender offer to buy their shares at $30 apiece in an effort to pressure Spirit’s management to come back to the table and negotiate.

Spirit shareholders are slated to vote on the Frontier deal in a special meeting on June 10.

ISS said JetBlue’s offer is superior from a financial standpoint, although it is “clearly a defensive offer that may also prove to be opportunistic,” given that Spirit shares traded above JetBlue’s original offer of $33 a share for a period last year.

The Spirit board’s view that a merger with Frontier would pay off for “patient investors” over the long term could prove to be correct, ISS said. Still, the firm said that taking the JetBlue deal provided more options for Spirit investors worried about risks that have emerged in the industry in recent months.

ISS also said Spirit’s decision to forgo an auction process gave it concern, “since investors lack market-based evidence that the deal presented in fact represents the best available alternative, as evidenced by the competing offer from JetBlue.”

Write to Alison Sider at alison.sider@wsj.com