Analysis: EasyJet takeover winner will seek a return

EasyJet seems certain to be taken into private ownership after a £5.7-billion takeover offer by US investment fund Apollo was accepted by the carrier’s board. But the precise outcome remains subject to some uncertainty.

 

New York-based investment and asset management fund Apollo Global Management is now clear favourite to acquire easyJet after the easyJet board announced “agreement in principle” on an offer it “would recommend to shareholders”.

 

The board had previously said it was merely “minded to recommend” the lower offer of rival US fund Castlelake. It justified the decision by noting Apollo offered “a higher cash value”. 

 

However, the offer is only £200 million higher and Castlelake could increase its bid, having already done so five times.

 

So, the outcome may yet be determined by a bidding war which might suit many shareholders if not the board. In the words of one analyst, it’s now “all about the number”.

 

The board’s preference has more to do with the fact that Apollo expressed support for easyJet’s existing plans for a fleet of larger, more fuel-efficient aircraft and expansion of easyJet holidays, suggesting it offers “long-term stewardship of the business”.

 

In a statement, Apollo said it “believes in easyJet’s existing strategy” and reassured the airline’s management team that it “recognises [their] important contribution”. 

 

It also acknowledged “the strong commitment of easyJet’s employees” and suggested they “will benefit from greater opportunities”.

 

Apollo owns assets and manages funds estimated to be worth near $1 trillion. These include interests in aviation. It has provided funds to Virgin Atlantic and Air France-KLM, invested in Aeromexico and in US carriers, and had reportedly been readying a bid for easyJet for some time. 

 

Analysts suggest Apollo must have “big plans” to achieve the return on investment it will seek from a deal based in substantial part on debt, which Barclays has confirmed it will arrange. 

 

They note easyJet’s operating margin of 10% last year was about half that of Ryanair – an obvious target for improvement – and that easyJet employs about 54 staff per aircraft compared to 43 at Ryanair.

 

Part of the reason for that is that easyJet operates at scale from more congested airports then Ryanair – Gatwick, in particular. Reducing headcount could threaten operations as easyJet has found to its cost in the past.

 

EasyJet board ‘half-hearted’ about rival bid

 

Castlelake’s bid for easyJet moved forward with half-hearted encouragement from the airline’s board only after the fund appealed directly to shareholders.

 

The board announced an agreement in principle on “the key financial terms” of a Castlelake offer valuing easyJet at £5.5 billion, it seems while already talking to Apollo.

 

This ‘fifth proposal’ from Castlelake was significantly up on its initial bid of £4.2 billion which suggests it was a fairly opportunist move as easyJet’s share price languished after the US launched war on Iran.

 

EasyJet’s statement that the latest terms were “at a value” the board could recommend to shareholders meant a takeover was on and invited competing bids. 

 

The airline’s board noted Castlelake “emphasised its tremendous respect” for easyJet and “support” for future growth and fleet modernisation. This is the kind of talk you would expect from an enthusiastic suitor but is a clue to its interest and to concerns for easyJet’s leadership.

 

Castlelake has interests in aviation, with a significant minority stake in Scandinavian carrier SAS, but its prime interest in the sector is in aircraft leasing – its assets include about 400 aircraft – which offers investment returns way above what airlines make.

 

However, most of Castlelake’s $36-billion worth of assets lie in finance and real estate. A recent deal, in April, involved an $8 billion purchase of a mortgage loan company.

 

The fund is majority owned by an even bigger fund, Brookfield Asset Management, with $1 trillion in assets in energy, infrastructure, real estate and private equity.

 

EasyJet operates 356 aircraft, with almost 300 more on order and purchase rights on another 100 at a time when securing aircraft deliveries is challenging.

 

The attraction of the airline to Castlelake would be that it appeared relatively cheap. Its assets alone, if broken up, are valued at £5 billion. 

 

Analysts view the airline as having a strong balance sheet, on course to increase profits, and worth closer to £7 billion. 

 

However, easyJet’s share price, which has long lagged Ryanair’s, plunged 30% on the outbreak of the US war on Iran. It has risen substantially following the takeover offers, but shareholders could be forgiven for being drawn to the highest bid.

 

EU ownership rules pose a challenge

 

A difficulty is that a deal would need to comply with EU rules that European airlines be at least 51% owned and controlled in Europe in order to operate freely across member states.

 

That is a significant hurdle which Castlelake suggests it would meet by including EU nationals Peter Bellew and Mark Breen as investors.

 

Bellew, former Ryanair chief operating officer, held a similar role at easyJet in 2020-22 but left following a spate of cancellations stemming from the headcount reduction during the Covid pandemic. 

 

He is now managing partner of an investment platform focused on AI in aviation.

 

Breen is chief executive of Dublin-based consultancy Oneiros Aerospace and previously held roles at airlines in Saudi Arabia, Qatar and the Philippines.

 

The pair appear unlikely to be able to invest more than half the total amount needed to complete the deal, suggesting Castlelake has both other investors in mind and plans a largely debt-funded (leveraged) buy-out.

 

This debt would need to be paid for by further monetising easyJet’s assets.

 

The easyJet board queried the “ownership structure and deliverability” of Castlelake’s first four proposals. These queries remain unaddressed despite Castlelake claim that it is “confident” regulatory approval would be “swift”.

 

Clearly, Castlelake would aim to extract increased profit to recoup its investment.

 

What that might mean for the airline, easyJet holidays, workforce, passengers and trade relations we might guess, but the value in the takeover if Castlelake proves successful appears all one way.

 

Apollo faces the same challenge in meeting EU airline ownership rules if it is to acquire easyJet.

 

Part of the solution could see easyJet founder Sir Stelios Haji-Ioannou involved. His family retain a 15% stake in easyJet. 

 

A royalty agreement pays Haji-Ioannou 0.25% of the airline’s revenue – a deal Apollo has confirmed it would retain, with “the expectation that the brand value and royalties will increase”.

 

That would leave a balance of 36% of easyJet stock to be held by other European entities. 

 

Apollo could retain other European shareholders through its offer to allow them “to roll their existing shareholding” into the fund’s investment in easyJet. However, shareholders doing that would miss out on a pay out.

 

Ultimately, Apollo would look to sell easyJet on or to take the carrier public again through an initial public offering of shares to realise its investment. The latter would depend on the state of the market, the former on meeting the requirements of competition regulators.

 

Apollo has an August 7 deadline to make a firm offer and Castlelake until August 3 to improve its bid.