It’s an obvious tactic for a would-be bidder to deploy when its offers have been rejected three times by the target’s board of directors: go public with the proposed terms and hope the shareholders demand new talks.
Castlelake’s playbook at easyJet is standard stuff and, since the “put up or shut up” bid deadline falls at end of this week, it had to try something. In its dream scenario, Stelios Haji-Ioannou would launch one of his old-style rockets at the easyJet board to shake things up. However, the airline’s founder and still 15% shareholder (with his family) has said nothing so far in support of either side.
Given the radio silence from Monaco, one can understand the stock market’s scepticism on Castlelake’s chances. The US investment firm’s last offer, rejected on Sunday, was at 625p a share, or £4.7bn. The very wide gap to the market price for easyJet’s shares of 518p, up only 2% on Monday, says a shareholder uprising is hard to detect currently.
The market’s assessment feels fair for two reasons. First, 625p does not feel close to a knockout price. It’s true, as Castlelake says, that easyJet’s shares haven’t traded at that level since early 2022 and were only 464p on the day before the Iran war. On the other hand, it’s not as if the airline is in crisis or in need of a saviour. It has merely underperformed Ryanair in financial terms for years, which is different, and its balance sheet is solid.
Indeed, the downside for easyJet shareholders ought to be protected by the weight of assets on the books. At the last count, the company put the tally at £5bn, mainly comprising the 208 aircraft it owns outright, plus landing slots. And the potential long-term upside, shareholders would surely hope, is well above 625p if and when skies become clearer.
This year’s profits will be miserable because of the fallout from the war but the “medium term” target of £1bn-plus is still officially intact thanks to various cost-saving programmes. True, the horizon for the aspirational round number is blurry but that is partly because the airline business rarely has perfect visibility – earnings are often volatile. The point, though, is that you don’t accept a so-so offer when next year’s outlook is brighter than today’s.
The second factor is the “deliverability”, as easyJet put it, of Castlelake’s bid structure, meaning whether it is aligned with EU rules that say European airlines must be majority-owned by investors within the region.
Under the proposal, there would be an “EU partner” in the form of a company led by two EU nationals, including one former easyJet executive, that would have a majority of the votes (and thus formal control) while the bulk of the economic ownership sat with Castlelake and its co-investors. The format looks convoluted, to put it mildly, even if the would-be bidder has legal opinion to say it’s just an adaptation of principles that operate at other airlines.
“The envisaged ownership structure is opaque and does not present any basis for assessing the deliverability of the third proposal,” said easyJet, sniffily but also putting its finger on a fundamental issue. If the EU ownership rules can be so easily bypassed, what’s the point of them?
Castlelake did, at least, give a bit more clarity on what it would actually do if it took command of the flight deck. Answer: “support easyJet as a stronger, more resilient European airline” and “sustain its network”. That suggests a break-up would not happen, even if there could still be scope for fancy footwork with leasing planes, which has been a core part of the US firm’s activity in the airline business before now.
In the end, though, this contest is about price and shareholder support. On the former, the bid looks less than the full ticket – still. On the latter, Castlelake desperately needs Stelios on its side just to make this interesting.
