UK low-cost airline easyJet is at the centre of a high-stakes battle between two US private equity firms as it navigates its potential exit from the London stock market. With Apollo's latest bid valuing the carrier at approximately £5.7 billion - 715p per share, up from Castlelake's previous offer of 690p - the market is abuzz with speculation that easyJet's board will seize on this opportunity to extract a premium for shareholders.
Apollo's bid stands out as a more robust proposition, not least due to its direct appeal to easyJet's founder, Sir Stelios Haji-Ioannou, whose family retains a 15% shareholding and controls the brand licence agreement. Apollo has indicated its intention to continue this arrangement and boost easyJet's revenues, offering a clearer strategy compared to Castlelake's somewhat less defined plans. What's more, Apollo is a significantly larger entity in the realm of corporate acquisitions, with Castlelake traditionally focusing on financing and leasing within the airline sector.
Both proposed takeovers come with a critical condition: they must adhere to EU ownership regulations, which stipulate that over 50.1% of an airline's ownership and control must be based within the European Union. While the involvement of two US firms suggests their legal teams believe this can be achieved, the market remains cautious. EasyJet's board would be prudent to negotiate a substantial break-fee, payable by the bidder, should EU regulators ultimately reject the proposed ownership structures.
Despite its share price being depressed, exacerbated by geopolitical events, easyJet is not considered a company in crisis. The airline boasts a strong asset base, including 208 wholly-owned aircraft, additional planes on order amidst supply constraints, and valuable landing slots, particularly at Gatwick Airport. The company's stated medium-term target of achieving over £1 billion in pre-tax profit, up from £665 million last year, remains achievable, according to easyJet's chairman, Sir Stephen Hester.
Apollo's offer suggests little deviation from easyJet's current strategy, expressing belief in the airline's existing low-cost model. The US firm indicates that easyJet's ambitions could be 'substantially accelerated' through access to additional capital. This implies that while public market investors might lack the appetite for the significant capital expenditure required to modernise easyJet's fleet in the coming years, Apollo is prepared to take on that risk, viewing the underlying business model as attractive.
This scenario mirrors a recurring theme in London's investment landscape: a perceived undervaluation of share prices creates opportunities for foreign entities to acquire UK companies. The current competitive bidding offers a chance for easyJet's board to revalue its shares and potentially reap significant rewards for shareholders, provided the airline can navigate the complexities of EU ownership regulations.