Forbes - Cheap flights are worth $6.6B

Kevin Dowd

Staff Writer

February 7, 2022

Big Things

Getty Images

1. A new day for Deal Flow

We'll get to the billion-dollar deals in a moment. But first, a different kind of big deal: I have a new co-author. Starting later this week, I'll be writing Deal Flow in tandem with Becca Szkutak, who covers venture capital for Forbes. You might know her from her work on the Midas Touch newsletter.

As Becca comes aboard, we're expanding Deal Flow's scope. All the buyouts, mergers and IPOs will still be here. Now, this newsletter will also cover the world of venture capital. Private equity and venture capital have always been closely linked, and these days, they're growing more interconnected than ever before. Becca and I think bringing our newsletters together under one umbrella will make it easier for our wonderful readers to keep amid this shifting climate.

But you get enough of my words in this newsletter. Let's turn things over to your new cohost for an introduction:

"Howdy Deal Flow readers! My name is Becca and I’m thrilled to be teaming up with Kevin on this endeavor. I think combining forces will allow us to offer our readers a full-stack look at the equity market from pre-seed all the way to multi-billion buyouts and public offerings. We hope this expanded coverage helps give the early-stage players more analysis of the trends at the top while giving private equity investors a peek around the corner of what’s to come.

I have been writing the Midas Touch newsletter since late February 2021 and have been covering venture capital at Forbes for a year. Prior to that, I covered the limited partner side of the VC market for trade publication Venture Capital Journal and spent a year writing about private debt at Private Debt Investor. Before that, I covered the local startup markets in Boston and Colorado for American Inno.

When I’m not noodling around in SEC Form D filings, or avoiding ever being on camera for a Zoom call, you can find me cooking overly elaborate meals, watching the NBA and NHL and hanging out with my husky puppy Patrice."

Now, it's on to the news—and starting this weekend, it's on to a new future for Deal Flow.

Spirit Airlines is merging with a discount rival. But it might have to reckon with regulators. Getty Images

2. A new Frontier

In the early days of passenger air travel, airlines ferried flyers through the skies in the lap of luxury. But as the industry matured, the economic model shifted. Those airlines realized that for many (perhaps most) flyers, the main concern is simple dollars and cents. Make tickets less expensive, and customers will make do with smaller seats, fewer amenities and less leg room. Then, you can squeeze more passengers onto each plane to make up the difference.

Not every carrier implemented the same strategy. But some decided to see just how low the costs could go. The business of carrying people 30,000 feet in the air became, in some respects, a race to the bottom.

Today, two of the winners of that race announced plans to combine. Frontier Group agreed to buy Spirit Airlines for $2.9 billion in cash and stock—the value of the deal climbs to $6.6 billion if you include debt and operating leases—to create the largest discount airline in the U.S. and the nation's fifth-largest airline of any kind.

Spirit chief executive officer Ted Christie said the deal will create "an aggressive ultralow fare competitor" that will be able to offer even lower prices to consumers and better compete with the industry's unofficial big four—American Airlines, Delta Air Lines, United Airlines and Southwest Airlines. The move comes with the air-travel sector still very much trying to recover from the evaporation of much of its business during the pandemic.

Already, though, there's speculation that the merger could draw the attention of regulators. Consolidation over recent decades has already shrunk the number of players in the passenger air-travel industry, as the very existence of an unofficial big four would indicate. And the space has already drawn recent antitrust attention. In September, the U.S. Justice Department filed a suit against American and JetBlue alleging that an alliance between the two had resulted in a "de factor merger" in some markets and was reducing competition.

In this case, it seems like the onus might be Frontier and Spirit to convince authorities that the deal will actually result in lower prices, instead of higher ones, and that it won't lead to a significant decrease of flight options. It will be a surprise if we don't hear from either the DoJ or the FTC on this one in the weeks to come.

If it does go through, the deal will result in current Frontier shareholders owning 51.5% of the combined company, with Spirit's investors holding the remainder. Chief among those Frontier shareholders is Indigo Partners, which acquired the company from Republic Airways in 2013 for a reported $145 million and maintains a major stake.

Today has been a long time coming for William Franke, the managing partner of Indigo. From 2006 to 2013, Franke was the chairman of the board at Spirit. Near the tail end of that stint, he pitched his colleagues on buying Frontier but couldn't convince them, so he quit the board and acquired Frontier through Indigo, instead. Nine years later, he finally managed to bring the two low-coast giants together. Now, he just has to convince regulators not to break them apart.

Toshiba is setting the stage for a new era. Getty Images

3. Toshiba changes tack

Three months after first revealing plans to split itself into three separate companies, Toshiba is shifting course. Now, it only plans to split itself in two.

The Japanese conglomerate said it will spin off its devices business as a standalone company and keep the rest of its assets under one roof; previously, it planned to create a devices company, an energy and infrastructure company and a third entity to house its Kioxia flash memory business. Toshiba outlined its original proposal in November in the midst of a minor flurry of corporate deconsolidation.

The main motivation for the change was to "ensure the split goes ahead," Toshiba chief executive officer Satoshi Tsunakawa said. The changed structure means the deal now only requires board approval to be enacted, rather than two-thirds support from shareholders. In a bid to ease that blow to investors, Toshiba said it now plans to return 300 billion yen (about $2.6 billion) to shareholders over the next two years, up from 100 billion yen under the original plan.

Toshiba stock closed up 1.6% in Tokyo today, a sign of general investor enthusiasm about the news. But we'll see what some of Toshiba's larger and more vocal shareholders have to say. Three weeks ago, Farallon Capital Management said it was "deeply concerned" about reports that Toshiba might decide to lessen its two-thirds approval threshold.

While its plans for a larger split are still coming into focus, Toshiba is breaking up its empire in smaller ways. The company announced plans today to sell its majority stake in an air-conditioner joint venture to Carrier Global, its partner in the venture, for 100 billion yen (about $867 million). It also announced plans to sell two other subsidiaries, one focused on elevators and another on lighting.

Other Things

• After multiple years of rumors, Tegna might finally be closing in on a sale of its 64 television stations and the rest of its media assets. Hedge fund Standard General and Apollo Global Management are in advanced talks to buy Tegna for $24 per share, according to multiple reports, which would value the company at some $5.3 billion. That's better than two bids that Tegna reportedly received last year: One for $22 per share from Standard General and Apollo and another for $23 per share from media magnate Byron Allen and Ares Management. Apollo already has a notable footprint in the local television business as the owner of Cox Media Group, which operates more than 30 stations.

• Takeover talks are swirling around Peloton. And investors are getting excited. Shares of the indoor cycling company were up nearly 17% during the first few hours of trading today, a reaction to recent reports that the likes of Amazon and Nike are considering bids to buy the business. Peloton's stock skyrocketed during the lockdown days of the early pandemic, but its has since come plummeting back to earth, falling more than 80% from its all-time high. It's now trading below its IPO price. But it seems like several tech and fitness companies see the appeal of perhaps combining with Peloton, allowing stationary bikes to be one part of a larger business instead of the whole shebang. Activist investor Blackwells Capital mentioned Apple as another potential suitor in a recent public letter calling on Peloton to consider a sale and to fire its CEO, John Foley.

• Shares of Bumble have tumbled more than 65% from their post-IPO high last February. Can branching into M&A help turn things around? The dating-app operator said today that it has bought Fruitz, another dating app that claims a particular affinity among members of Gen Z, marking Bumble's first acquisition. Founded in France in 2017, Fruitz currently operates in five European countries, plus Canada. The company's pitch is that its app "encourages open and honest communication of dating intentions through four playful fruit metaphors—cherries, grapes, watermelons, and peaches." Do I want to know? I don't think I want to know.

• Last week, The Carlyle Group chief executive officer Kewsong Lee hinted at the firm's plans for M&A in the credit space. A day later, reports emerged that Carlyle is in advanced talks to purchase CBAM, a credit investor with some $15 billion in assets under management, with Bloomberg reporting a potential price between $750 million and $850 million. CBAM, which was founded just six years ago, is currently owned by Todd Boehly and his Eldridge Industries. Lee's words and the news of a potential deal are the latest signs of Carlyle's ambitions to keep pace rivals such as Apollo Global Management and Blackstone in the credit space, which has emerged in years as an increasingly attractive arena for buyout heavyweights.

• Speaking of Apollo Global Management: Anthony Civale plans to retire from his position as the firm's co-COO, per Bloomberg, which cited an internal memo. The 47-year-old Civale has worked at Apollo since 1999. This is, of course, not the most high-profile change in the Apollo C-suite over the past year. Leon Black left his positions as CEO and chairman early last year in the aftermath of an investigation into his payment of more than $150 million to Jeffrey Epstein. Marc Rowan, a co-founder and the architect of Apollo's insurance strategy, stepped into the CEO role. And Josh Harris, a third co-founder, stepped away from the firm after losing a power struggle with Rowan. The drama related to all those moves is still making headlines.

• Permira and Warburg Pincus are getting ready to exit their investments in wealth manager Tilney Smith & Williamson, and they're eyeing a valuation somewhere between £2 billion and £3 billion, according to the Financial Times. The desire to make up for lower fees with increased scale has driven a string of recent sales involving wealth managers, and this could be the latest. It's been less than 18 months since the company was formed through Tilney's acquisition of Smith & Williamson for £625 million. Permira was already Tilney's owner, and Warburg Pincus invested at the time of the merger. The co-owners are reportedly considering both a sale and an IPO.

• Brazil's Ebanx became the latest major name to call off a public debut due to volatile markets. The fintech company no longer plans to conduct an IPO during the first half of this year, per a Bloomberg report, but it does still plan list its shares in the future, with hopes of reaching a $10 billion valuation. Advent International made a $430 million investment in Ebanx last June, with $30 million of that sum comprising a future commitment to Ebanx's eventual IPO in the U.S. FTV Capital is another major backer of Ebanx, which makes cross-border payments tools for merchants and shoppers in Latin America.

• Consumer products and pet-care conglomerate Spectrum Brands signed a pact to buy the home appliance and cookware units of Tristar Products for at least $325 million in cash, plus as much as $125 million in additional payment based on future performance. The move continues a reshaping of Spectrum's portfolio, coming about five months after the Wisconsin-based company agreed to sell its hardware and home improvement division to ASSA ABLOY for $4.3 billion. This is Spectrum's largest acquisition since completing a $10 billion mega-deal for HRG in 2018. The Tristar unit will join an existing portfolio of home and appliance brands under Spectrum's control that includes Black & Decker, Remington and George Foreman.

Things To Read

Flexport CEO Ryan Petersen has emerged as the public face of the fight to fix America's supply chains. Within the world of logistics, though, his reputation is a bit more complicated. [Forbes]

Abrdn's inability to find 120 million pieces of paper is delaying its plans for a £1.5 billion takeover. [Financial Times]

It seems like every company wants more IT workers these days. One side effect: More M&A. [The Wall Street Journal]

A look at how and why Singapore is trying to turn itself into the next SPAC hot spot. [Reuters]

In 1989, Michael Lewis published a book that changed the public perception of Wall Street. Thirty-three years later, he looks back on "Liar's Poker." [The New York Times]

Kevin Dowd

Staff Writer

I am a staff writer at Forbes. I previously wrote for PitchBook, where I created The Weekend Pitch, a weekly newsletter about the private markets. Before that, I covered high school sports in the Pacific Northwest, and I graduated from the University of Washington with a degree in journalism and creative writing. I live in Seattle, where I read a lot of books and play a lot of golf.

Follow me on Twitter.

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Forbes - Cheap flights are worth $6.6B

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