Shares in easyJet hit four-year highs on Monday after the British budget airline agreed in principle to a £5.5 billion ($7.34 billion) takeover from US investor Castlelake, though caution over regulatory hurdles capped market gains.
EasyJet said on Sunday it was open to Castlelake's sweetened bid of £6.90 per share, a big jump from the U.S. firm's opening gambit of £5.60, suggesting winding negotiations could finally see the London-listed carrier be taken private.
However, reflecting some investor skepticism around the deal, the shares held at £6.14, up 10% but still well below the bid price. The stock has, however, already gained more than 50% since Castlelake's interest became public in late May.
"Nothing is certain, but I would think there is a high possibility that it will go ahead," said aviation analyst James Halstead. The offer looked like a "fair price" assuming easyJet hit medium-term profit targets, he said.
The deal underscores how a series of crises in Europe, including Russia's invasion of Ukraine, the Covid-19 pandemic, and the Iran war this year, have sideswiped airlines and put some carriers in investors' crosshairs for takeover.
Initially, easyJet had said Castlelake's proposals were "highly opportunistic" given the broader global context.
Airlines around the world have struggled with the weight of spiraling jet fuel prices, facing losses tied to the conflict. Analysts have said they expect more consolidation and bankruptcies as a result of geopolitical uncertainty.
Deal will need to address 'complex' EU ownership rules
The bid made public by easyJet on Sunday was Castlelake's fifth offer for the airline and was a nearly 24% premium to easyJet's close on Friday. It is close to the £7 price some investors were reportedly holding out for after Castlelake's four previous proposals were rejected.
Airline analyst John Strickland said the share price reflected challenges all airlines are facing with "higher fuel prices and uncertainty in the context of the Iran war."
He didn't see antitrust issues but pointed to European Union ownership rules that require airlines operating in the bloc to be majority-owned and controlled by EU nationals.
"The EU ownership and control elements are complex, and it is not yet fully clear how this will be addressed," he said.
A shareholder who declined to be named noted that current share price levels indicated the market was pricing a more than 30% probability of the deal falling through.
JPMorgan analysts also raised concerns about how aviation-focused lender Castlelake and easyJet would meet EU ownership rules and agree on a structure, with founder and major shareholder Stelios Haji-Ioannou's views also unclear.
EasyJet said on Sunday that Castlelake had agreed to a "best endeavors" commitment to obtain regulatory clearances. Haji-Ioannou declined to comment on Monday.
Castlelake has previously said it would own 49% of the bidding vehicle with the remainder held by two EU nationals, former easyJet chief operating officer Peter Bellew, and senior industry executive Mark Breen.
Castlelake to steer easyJet to clearer skies?
JPMorgan also said that shareholder approval was not guaranteed, with the prospect of a counterbid also open, or other carriers looking to buy parts of easyJet.
"While a decent premium to the lackluster trading of recent years, it still represents a deep discount to the share price of the late 2010s," said Chris Beauchamp, chief market analyst at trading platform IG.
"A sign of how in need easyJet is for someone to take the controls and plot a more successful flight path."
Castlelake must formalize its offer by August 3 or walk away under British takeover rules.
The potential take-private deal also includes a partial equity alternative.