If the cash call was predictable, then a bid approach from rival Wizz Air was anything but
It’s all go in the budget airline space with easyJet PLC at the centre of the action on Thursday. The orange liveried staple of UK regional airports earlier announced a GBP1.2bn rights issue alongside a GBP290mln credit facility as it sought to shore up its balance sheet.
As broker Peel Hunt pointed out: “The capital raise is unsurprising given the continuing travel restrictions over the summer and inevitably high cash burn over the winter, even if restrictions and testing requirements are eased following the government review, which should be published on October 1.”
If the cash call was predictable, then a bid approach from rival Wizz Air Holdings (AIM:WIZZ) PLC was anything but. It was unanimously rejected by the easyJet board as “a low premium, highly conditional all-share offer”. Stick that in your pipe and smoke it.
Bigger than IAG
Combined the two would have been capitalised at north of GBP8bn, making an enlarged Wizz-easyJet (Wizz-jet, anyone? easyWizz?) worth more than the Iberia and BA owner International Consolidated Airlines Group (LSE:IAG).
easyJet’s rejection of the low-ball amalgam will no doubt have been predicated on a self-help plan that is already well underway to carve out annual cost savings from the business of GBP500mln a year.
Counterbalancing that, demand seems to be slow in coming back – though that’s a problem for all of the world’s airlines. In the fourth quarter easyJet expects to be flying 57% of 2019 capacity, and up to 60% in the first quarter of 2022.
That’s not a pretty picture when you consider low-cost carriers often need their flying aluminium tubes to be full to the gunwales to make a profit.
Wizz, which focuses on central and eastern Europe rather than the holiday routes to the Med, appears to be faring a lot better.
In August, it sold 3.6mln seats, down just 200,000 from the same month in 2019. Whether Wizz will be back with another tilt for easyJet, with a cash element and a juicy premium remains to be seen. easyJet may even catch the eye of private equity looking to splash the cash. That said, it doesn’t really fit the template.
It’s not an undervalued, asset-based, cash cow with a recurring revenue base that can be fixed or re-engineered. This is a cyclical business that is haemorrhaging money.
In other words, it would require a different breed of PE group to swoop in for the stricken airline. The market reaction said it all – the stock was down 11% and friendless.
While much of the decline is anticipatory of the dilution from the rights issue, investors are still not pricing in a bid premium as they did with the likes of Morrisons et al ahead of takeover approaches.
Airline stocks flying under a cloud
In the meantime, all the airline stocks are currently flying under a cloud with traders fearing there may be a mass stampede to the ‘watering hole’ after the easyJet City fundraiser.
These are interesting times for easyJet and the wider airline industry, but no less complicated than they have been over the last 18 months with the Covid delta variant derailing the recovery and depressing economic growth. Should you be buying airline shares now? There’s an argument to say that much of the putative recovery has already been priced in, yet very little of said recovery is yet to materialise.
Like many investors, my backside will be covered in splinters sitting on the fence with this little conundrum.