Castlelake To Buy EasyJet For $7.3+ Billion: What’s The Real Motive, Though?

EasyJet is Europe’s second largest ultra low cost carrier, and also Europe’s second largest individual airline brand (after Ryanair, by both metrics). In recent weeks, we’ve known that US investment firm Castlelake was looking to buy the airline and take it private.

While EasyJet’s board rejected the initial takeover offers, they finally got an offer they agreed to, so a deal may very well move forward. However, it’s far from a sure bet, and the big question remains, why exactly is Castlelake so interested in acquiring EasyJet?

EasyJet board approves Castlelake’s $7+ billion takeover bid

EasyJet’s board of directors has agreed in principle to a takeover offer from US investment firm Castlelake. This has been quite the process, as the board had first rejected offers starting at £5.60 per share, but Castlelake kept upping its offer, and the board finally accepted a £6.90 per share offer. This values the company at £5.5 billion, or a little over $7.3 billion.

Now, there are still three major hurdles:

• Castlelake is a non-European company, so it can’t directly own a majority of EasyJet, so it needs European partners who get in on the deal as well; the company claims it has two Irish advisory businesses that will also take part in the deal to meet that requirement, but we’ll see how that plays out
• This deal needs formal approval from EasyJet shareholders (and not just the board), and there are questions about whether they’re willing to accept the current offer price that the board has conditionally approved
• This deal also requires regulatory approval, and I imagine European regulators will want to know what the company’s plans are for the future, and how that impacts consumers

For those not familiar with Castlelake, the company was involved in the deal to acquire Scandinavian Airlines (SAS) after its reorganization, with the firm taking a roughly one-third stake in the airline. This was done in partnership with Air France-KLM.

Air France-KLM CEO Ben Smith said several weeks back that the airline group would be open to discussions to invest in EasyJet, but signaled that the company wasn’t involved in a formal bid at the time.

One certainly wonders if this could be another deal where Castlelake and Air France-KLM partner, to allow the airline group to expand its position across Europe. While Air France-KLM has its own low cost carrier subsidiary, Transavia, acquiring EasyJet would allow it to expand massively, and there’s definitely upside there.

What’s the real goal with investing in EasyJet?

While we’ve seen a lot of consolidation in European aviation, one logical question is why Castlelake is so interested in acquiring EasyJet, especially given the regulatory challenges. What’s the huge upside that Castlelake sees?

EasyJet is profitable, but not massively so. It’s not nearly as profitable as Ryanair (which has incredible efficiencies and scale), and it’s also not as profitable as Jet2 (which does an amazing job selling vacation packages, and that’s good for margins). But still, EasyJet executives have been promising that profitability will increase in the coming years. While EasyJet achieved a net profit of around £500 million last year, the company is aiming to roughly double that amount in the coming years (how realistic that is remains to be seen).

What’s interesting is that analysts suggest that the company’s break-up value is over £8 billion, referring to the value of its assets, including its fleet of planes and slots, which greatly exceeds the company’s market cap.

Some suggest that the plan here is to actually basically shut down EasyJet, and do something else with its aircraft and assets. That strikes me as being rather unlikely, especially in the framework of getting regulatory approval.

However, one also wonders about the disconnect between the company’s market cap, and the alleged value of the assets. Why hasn’t the company’s stock price reflected the value of the assets more? Is Castlelake somehow the only investment firm that notices that value, or what’s going on, exactly?

At this point I’d assume that this is far from a sure bet, in terms of purchase price, the parties involved, and whether this gets regulatory approval. I’m very much looking forward to seeing what the actual motive here is.

Bottom line

EasyJet’s board has tentatively approved an offer for Castlelake to acquire the company for $7.3+ billion, taking it private. EasyJet is interesting for the fact that the value of its assets (aircraft and slots) is estimated to be higher than its market cap.

Even though a deal has tentatively been approved, there’s still a huge uphill battle here, in terms of shareholder approval, regulatory approval, and a European partner. Then the big question is what Castlelake’s plans really are.

What do you make of EasyJet going private?