EasyJet shares reveal deal risk as $7.3 billion takeover advances

Investor says ​share levels point to market pricing deal failure (Adds investor comment in paragraphs ​4-5, context about easyJet's operators, updates share price move)

By Prerna Bedi, Joanna Plucinska and Alessandro Parodi

LONDON, - Shares in easyJet ​hit four-year highs on Monday after the British budget airline agreed in principle to a £5.5 billion ($7.34 billion) takeover from U.S. investor Castlelake, though caution over regulatory hurdles capped market gains.


EasyJet said on Sunday it was open to Castlelake's sweetened bid of £6.90 per share, a big jump from the U.S. firm's opening gambit of £5.60, suggesting winding negotiations could finally see the London-listed carrier be taken private.

However, reflecting some investor scepticism around the deal, the shares ‌held at £6.14, up more ⁠than 9% ⁠but still well below the bid price, with European ownership rules that require airlines operating in the bloc to be majority EU-owned in focus.

"It's a difficult situation," said Nick Longhurst, portfolio manager for Europe at investor Marathon Asset Management, ​adding that while the board would have considered the EU requirements, there were still questions over funding and control.

"This is an airline which operates under both UK and European rules and thus has ​to be majority owned and controlled by EU entities/individuals, which the bidder Castlelake is not."

The deal underscores how a series of crises in Europe, including Russia's invasion of Ukraine, the COVID-19 pandemic and the Iran war this year have sideswiped airlines, putting some carriers in investors' crosshairs for takeover.

Airlines around the world have struggled with the weight of spiralling jet fuel prices, ​facing losses tied to the conflict. Analysts have said they expect more consolidation and bankruptcies as a result of geopolitical ⁠uncertainty.

Initially, easyJet ‌had said Castlelake's proposals were "highly opportunistic" given the broader global context. The stock has, however, gained more than 50% since Castlelake's interest became public ​in late May.

DEAL WILL NEED ​TO ADDRESS 'COMPLEX' EU OWNERSHIP RULES

The bid made public by easyJet on Sunday was Castlelake's fifth offer for the airline, and was at ⁠a nearly 24% premium to easyJet's close on Friday. It is close to the £7 price some investors were reportedly ​holding out for after Castlelake's four previous proposals were rejected.

Airline analyst John Strickland said the share price reflected challenges all ​airlines are facing with "higher fuel prices and uncertainty in the context of the Iran war".

He did not see antitrust issues, but pointed to European Union ownership rules that require airlines operating in the bloc to be majority-owned and controlled by EU nationals.

"The EU ownership and control elements are complex, and it is not yet fully clear how this will be addressed," he said.

A shareholder who declined to be named noted that current share price levels indicated the market was pricing a more than 30% probability of the deal falling through.

JPMorgan analysts also raised concerns about how aviation-focused lender Castlelake and easyJet would meet EU ownership rules and agree on a structure, with founder and major shareholder Stelios Haji-Ioannou's views also unclear.

EasyJet said on ‌Sunday that Castlelake had agreed to a "best endeavours" commitment to obtain regulatory clearances. Haji-Ioannou declined to comment on Monday.

Castlelake has previously said it would own 49% of the bidding vehicle, with the remainder held by two EU nationals, former easyJet chief operating officer Peter Bellew, and senior industry executive Mark Breen.

CASTLELAKE ​TO STEER EASYJET TO ​CLEARER SKIES?

JPMorgan also said that approval from shareholders ⁠was not guaranteed, with prospects of a counter bid also open, or other carriers looking to buy parts of easyJet.

"While a decent premium to the lacklustre trading of recent years, it still represents a deep discount to the share price of the late 2010s," said Chris Beauchamp, chief market analyst at trading platform IG.

"(It's) a sign of how in need ​easyJet is for someone to take the controls and plot a more successful flight path."

EasyJet flies routes in 38 European countries, operating 355 aircraft across more than 1,200 routes. It has struggled to recover since the COVID-19 pandemic, though its package holidays business and efficient Airbus fleet are bright spots.

Castlelake must formalise its offer by August 3 or walk away under British takeover rules. The potential take-private deal also includes a partial equity alternative.

Aviation analyst James Halstead said that the offer looked like a "fair price" assuming easyJet hit medium-term profit targets. Castlelake could help the firm boost its performance.

"Nothing is certain, but I would think there is a high possibility that it will go ahead," he said.