Interactive Investor

ii view: easyJet confirms rights issue after rejecting takeover

9th September 2021 10:52

Keith Bowman from interactive investor

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The budget airline is raising £1.2 billion to boost its finances in a still uncertain trading environment.  

Fundraising and trading update

  • A £1.2 billion underwritten rights issue
  • New $400 million (£288 million) secured revolving credit facility
  • Capacity in fourth-quarter 2021 expected to be approximately 57% of Q4 2019 levels

Chief executive Johan Lundgren said: 

"The capital raise announced today not only strengthens our balance sheet enabling us to accelerate our post-Covid-19 recovery plan but will also position us for growth so that we can take advantage of the strategic investment opportunities expected to arise as the European aviation industry emerges from the pandemic.

"Since the onset of the pandemic, we have undertaken decisive and robust action to restructure our operations, addressed our cost base and secured our financial position, keeping our investment-grade credit rating. We have worked hard to maintain our customer friendly brand and network and been rewarded with immediate growth in demand when travel restrictions have been lifted.”

ii round-up:

Low-cost airline easyJet (LSE:EZJ) today outlined plans to raise £1.2 billion from shareholders in order to strengthen its balance sheet after rejecting a takeover approach. 

Terms of the rights issue are 31 new easyJet shares for every 47 existing shares held at a price of 410p each. That’s a discount of 35.8% to the theoretical ex-rights price of 638p per existing share based on last night’s closing price.

Given the ongoing uncertain trading environment, the fundraising is being made to protect its long-term positioning in the European aviation sector and support growth as new opportunities arise from the Covid crisis. 

easyJet shares fell by more than 10% in UK trading, leaving them up by around a third since pandemic induced market lows in March 2020. Shares for European short haul rival Ryanair (LSE:RYA) are up by around 80% in that time, while shares for British Airways owner International Consolidated Airlines (LSE:IAG) are up by about 10%.

easyJet did not name who the spurned takeover approach was from, although speculation focused on rival Wizz Air (LSE:WIZZ). The all-share approach was made at a level which easyJet management believed undervalued the airline. The potential bidder has since confirmed that it is no longer considering an offer for easyJet.

Along with bolstering its finances, the new shareholder funds via a yet to be fully detailed rights issue will also be used to expand its fleet of environmentally friendly aircraft and help grow its relatively new holiday business.

The fully underwritten or bank backed rights issue and new $400 million (£288 million) revolving credit facility come as trading improves. Capacity or flights run in the final quarter of 2021 is expected run at approximately 57% of those run in the final quarter of pre-pandemic 2019 levels. That’s up from just 17% in the prior third quarter. First-quarter 2022 capacity is expected to reach 60% of that flown in Q1 2019. 

ii view:

Launched in 1995 and floated on the London Stock Exchange in 2000, easyJet is a short-haul European airline operating a fleet of Airbus aircraft. Measures taken by the Luton headquartered airline to battle the pandemic include cutting staff numbers by around a third and selling and leasing back assets such as planes and buildings. For the year to the end of September 2020, it reported a headline pre-tax loss of £835 million. Today’s planned fundraising adds to the more than £5.5 billion raised since the start of the Covid-19 crisis.  

For investors, the degree of outlook uncertainty remains high. The International Air Transport Association’s (IATA) forecast is for global air travel to return to pre-pandemic levels by around end-2023. The spread of the Delta variant remains a concern, while a lead economist previously noted that the Covid crisis is not over until its over everywhere. 

That said, a heavy focus on costs and previously better-than-expected rates of cash burn do offer reassurance. The new fundraising is fully underwritten, meaning that easyJet will receive its funds and bolster it balance sheet one way or another, while the group’s low-cost business model has seen it benefit to the detriment of national airlines over recent years. Shareholders must consider their own circumstances when deciding whether to take up the rights issue offer. However, with trading tentatively improving and the valuation remaining at a discount to both historical levels and peers, the business will likely remain of interest to long-term investors.

Positives: 

  • On track to achieve approximately £500 million in savings this financial year
  • Discounted valuation

Negatives:

  • Ongoing pandemic uncertainty
  • Factors outside of management’s control like the weather can hinder performance

The average rating of stock market analysts:

Buy

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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