EasyJet shares soar: US investor shows interest in buying the low-cost carrier

Shares of British low-cost carrier EasyJet soared at an intraday high of 13% in trading on June 1. At the end of last week, American investment firm Castlelake expressed interest in taking over the air carrier. EasyJet's board of directors, however, has already called the idea "highly opportunistic", but the proposal alone could have serious implications for the industry, says the Financial Times (FT).

Castlelake said late Friday night, Ma. 29, that it was considering making an offer to buy EasyJet, while warning that the initiative may not materialize, Bloomberg reported. Under British M&A rules, Castlelake is required to offer at least 403.23 pence for each EasyJet share - based on the price it paid for the 2.14% stake it already owns in the low-cost carrier. The investment firm has until June 26 to either make a formal offer or reject the deal, Bloomberg noted.

On Monday, June 1, Castlelake said any offer to buy EasyJet would value the airline at a minimum of $4.12 billion, 1.3% above the carrier's market value at Friday's close, The Wall Street Journal points out.

Castlelake is known as a global private equity firm. According to Castlelake representatives, it has about $36 billion in assets under management.

The low-cost carrier's management responded to Castlelake's possible takeover offer by saying that the carrier's board remains confident in its strategy given the company's financial position and earnings outlook.

"The board notes the highly opportunistic timing of EasyJet's share price being temporarily undervalued due to the current situation in the Middle East, its impact on customer confidence, and the price of jet fuel," EasyJet said in a statement (quoted by Bloomberg).

EasyJet has set a medium-term target for annual profits of £1 billion ($1.35 billion), helped by its rapidly growing travel business, the agency said. However, analysts expect that figure to be less than £100 million ($134.6 million) this year, down from £665 million ($895 million) a year earlier. That ten-figure target "looks a long way off today", says Andrew Lobbenberg of Barclays, the FT reports.

Despite a jump on June 1, EasyJet securities have lost more than 14% since the beginning of the year, as the airline industry is going through one of its most challenging periods and soaring jet fuel prices are creating uncertainty about travel demand, Bloomberg notes. The value of EasyJet's securities has fallen by almost a third over the past 12 months, the worst performance in the European airline industry. By comparison, the Stoxx Europe airline index added 10% over the same period.

The fall in EasyJet's share price since the start of the year has pushed the carrier's market capitalization down to around £3 billion ($4.04), while free cash on its books is £434 million ($584.3), the Financial Times points out.

EasyJet's price/earnings (P/E) ratio for last year is above the European industry average but remains below that of global carriers, the Financial Times said. The business should be "a priority investment opportunity when a credible peace is achieved in the Iranian conflict," Lobbenberg said.

It may be the company's fleet that attracts Castlelake, the newspaper notes. EasyJet has 356 airplanes at its disposal, and another 287 units are under contract. The low-cost carrier will receive about 90 of them in the next three years. Around 42% of the carrier's aircraft are under lease, with it owning almost all of the new generation A320neo and A321neo models. According to the FT's industry sources, Castlelake acts as one of the airline's lessors. According to analysts, even taking into account only the current fleet of airliners, the value of EasyJet's fleet exceeds its market capitalization.

EasyJet also has landing slots at several prestigious airports, including Brussels, Frankfurt and Paris-Charles de Gaulle, as well as a dominant position at London Gatwick, notes the FT. The company's extensive presence in the UK means it is the main local short-haul carrier for many British citizens for whom British Airways' Heathrow base is too far away, the newspaper points out.

Although there have been no formal discussions or offers from Castlelake regarding a takeover of EasyJet, the public expression of interest came at a vulnerable period for EasyJet, Bloomberg notes. In addition, the announcement has sparked a debate among industry executives, analysts and investors as to what exactly the U.S. investment firm wants from the British low-cost carrier, the FT reports.

Among the possible scenarios are the continuation of EasyJet's operations as an independent air carrier, management of the business with the purpose of its subsequent resale to another specialized company (Castlelake acted according to a similar scheme last year, when Air France-KLM holding acquired a majority stake in Scandinavian Airlines System (SAS) - Castlelake then led a consortium that provided funding for the restructuring of SAS), or liquidation of the low-cost carrier with the sale of its assets in parts, the newspaper notes.

"EasyJet is the animal at the very back of the herd, they are the most likely to be the next to get mauled," the FT quoted analyst Andrew Charlton, who heads Aviation Advocacy, as saying.

At the same time, being a U.S. legal entity, Castlelake will not be able to get full control over EasyJet, as the airline operates under British and European regulations that require that majority ownership and control remain with residents of these regions, Bloomberg notes. This means that the investment company will have to either partner with a carrier or investor from the UK or EU, or agree to a smaller stake in the business.

"We see a low likelihood of a formal near-term purchase offer in its current form, but a higher likelihood of a deal involving a strategic partnership. However, this interest in itself is important as it highlights the intrinsic value of EasyJet's assets, which is not fully reflected in the current market valuation," Bloomberg quoted Goodbody analyst Dudley Shanley as saying.

Interest from Castlelake could also spur other bidders into action - possibly triggering a takeover bid for EasyJet from British Airways (BA), which has been under discussion since 2021. BA's owner, IAG Holding, has said it expects consolidation in the industry and has been approached by several airlines, although a number of FT sources close to the corporation say it is not currently in talks with EasyJet.

"Buying airline assets now is far from a foolish decision," said Andrew Lobbenberg of Barclays, partly because EasyJet's assets are "attractive and undervalued relative to market value".

This article was AI-translated and verified by a human editor