EasyJet may regret ignoring its bird in the hand

easyJet

Today 17:04

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By Oliver Taslic

    LONDON, June 22 (Reuters Breakingviews) - EasyJet’s EZJ.L suitor has revealed its hand. The UK-listed carrier announced on Monday that its board had rejected a £4.7 billion ($6.3 billion) approach from U.S. alternative investment firm Castlelake, describing it as an “attempt to acquire easyJet ‘on the cheap’”. While there are valid reasons, saying no carries risks.
In one sense, Castlelake’s pitch is indeed opportunistic. Despite offering a 35% premium over pre-Iran war levels, the suitor’s latest 625 pence-a-share approach values easyJet around £4.3 billion including net cash. In May the company said the net book value of its aircraft and other owned assets was £5 billion. Bernstein analysts also estimated earlier this month that breaking up easyJet could be worth 700 pence to 800 pence a share, when including assets like landing slots, the package holidays unit and its “order book”, with the airline set to take delivery of hundreds of new jets in the coming years.
EasyJet shareholders – including the roughly 15% stake held by founder Stelios Haji-Ioannou and his family – could just wait for the shares to re-rate. By 2030, analysts expect the company’s earnings per share to have jumped from around 12 pence this financial year to over 80 pence, according to estimates compiled by Visible Alpha. At the 15 times earnings multiple sported by the carrier before the pandemic, it could be worth well over 1,000 pence.
Still, it’s hard for shareholders to trust easyJet boss Kenton Jarvis can get the shares back to these dizzy heights. Between mid-2022 and late February this year, the orange airline’s stock fell around 6%, compared to a roughly 100% gain at Ireland’s Ryanair RYA.I. Though the package holidays business is performing well, the airline unit has had to contend with fierce competition and operating on less mature routes, as well as general industry headwinds like rising staff, air traffic control and environmental costs. Before the war made the metric a bit fuzzy, easyJet’s earnings multiple was in the mid single digits.
It’s also risky to assume another bidder will come in. Luis Gallego, CEO of British Airways owner and most logical buyer IAG ICAG.L, said last week that antitrust hurdles in Europe would make a bid “very, very difficult”. In any case, if IAG offered the same £4.3 billion including net cash as Castlelake, it would get a return on investment of less than 8%, assuming operating profit in easyJet’s next financial year of £438 million and a tax rate of 25%.
Castlelake may come to the rescue by lobbing in a fourth approach ahead of Friday’s deadline – its background in aircraft leasing should allow it to find economies others cannot. But on Monday easyJet shares languished below 520 pence, radiating scepticism a deal will happen. If it doesn’t, shareholders will have to trust a self-help process that up until now hasn’t looked great.
     
Follow @Breakingviews on X
     
     
CONTEXT NEWS
U.S. alternative investment firm Castlelake said on June 22 that it had submitted three non-binding indicative proposals to the easyJet board to acquire the UK-listed airline group.
Castlelake said its third proposal, submitted in a letter dated June 20, was at an offer price of 625 pence in cash per share. The easyJet board rejected the proposal on June 21, the U.S. firm said.
Castlelake added it was announcing its third proposal to enable easyJet shareholders to “consider its merits and provide their views” before the “put up or shut up” deadline on June 26, when Castlelake must either make a firm offer or walk away.
Later on June 22, easyJet also announced it had rejected the third proposal, saying it “represents an opportunistic attempt to acquire easyJet ‘on the cheap’ and that it is therefore not in the best interests of easyJet shareholders”.
Shares in easyJet were up 3.4% at 521 pence at 1400 GMT on June 22.

(Editing by George Hay; Production by Streisand Neto)
((For previous columns by the author, Reuters customers can click on TASLIC/oliver.taslic@thomsonreuters.com))