Republic Airways and Transportation, Distribution & Logistics

Private equity group may bid on Republic subsidiary

August 1, 2013

Spirit Airlines Inc.’s largest investor, private-equity firm Indigo Partners LLC, is preparing to sell its stake in the discount carrier in what could be preparation to make a bid for Frontier Airlines, a Cowen & Co. analyst said Wednesday.

Frontier’s Indianapolis-based parent, Republic Airways Holdings Inc., has had the carrier on the market for the past 18 months and a “deal could happen in the next several weeks,” Helane Becker, a New York-based analyst at Cowen, said in a report.

Spirit shares fell the most in 10 months after Indigo filed to liquidate 12.1 million shares, or a 17-percent stake, in the carrier. Earlier, the stock fell 7.3 percent for the biggest intraday drop since September.

Indigo unloading its shares means managing partner William Franke will step down as non-executive chairman of the Miramar, Fla.-based discount airline. The private-equity firm is in exclusive talks with Republic, Dow Jones reported, citing an unidentified person familiar with the situation.

Anchorage Capital Group  of New York City is also a possible bidder, Dow Jones reported.

Republic said it had entered into an exclusive, non-binding agreement with a third-party buyer for Frontier, which operates a fleet of about 50 planes in the Airbus 320 family, during a company conference call earlier this month.

“If Indigo were to acquire Frontier, it would be negative for Spirit because Bill Franke and his team at Indigo have intimate hands-on knowledge of the Spirit business model and its market potential,” James Parker, an analyst at Raymond James & Associates Inc., wrote in a note to investors.

Franke decided to resign as Spirit’s chairman because he was concerned he couldn’t be a director of two competitors at the same time, Dow Jones reported.

Prior to Spirit, Franke served as chairman and CEO of America West Airlines Inc., the airline that combined with US Airways Group Inc. in 2005 and kept that carrier’s name. John Wilson, a principal at Indigo and former executive at America West, will also step down from Spirit’s board after the sale is completed.

Peter Kowalchuk, a spokesman for Republic, declined to comment. Representatives from Phoenix-based Indigo didn’t immediately respond to calls for comment.

If Indigo purchases Frontier, it would “raise the potential for a successful competitor for Spirit,” said Parker, who rates the shares outperform.

On a conference call this month, executives at Republic said that airline had entered into an exclusive, non-binding agreement with a third-party buyer for Frontier, which operates a fleet of about 50 planes in the Airbus SAS 320 family.

Republic Chief Executive Officer Bryan Bedford has said he wants to transform Frontier into a low-cost, high-fee carrier like Spirit. In May, Frontier announced plans to start charging customers for carry-on baggage and refreshments.

“We are continued in our determined focus on transforming Frontier into an ultra-low-cost carrier,” Daniel Shurz, a senior vice president at Frontier, said during the Republic conference call this month.

Bedford also said Republic wouldn’t continue to invest in turning Frontier into a low-cost carrier. Instead, the company would allow an investor to decide whether to pursue the strategy, he said on the call.

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