EasyJet’s stock shows Castlelake bid is far from a done deal

Castlelake cannot take full control of EasyJet because U.K. and EU ownership rules require majority regional ownership, meaning it needs a partner

EasyJet Plc stock traded well below Castlelake LP’s latest takeover bid, signaling investors remain concerned about the potential barriers facing the £5 billion-plus deal.

The budget carrier finally agreed in principle to the U.S. investment firm’s offer of £6.90 per share in cash after calling previous bids too low. The airline’s stock jumped Monday by as much as 11%, yet it languishes beneath even the third and fourth rejected offers by Castlelake.

EasyJet and Castlelake haven’t specified what will happen to the airline’s assets, management and employees if the deal goes through. If Castlelake decides it wants to sell assets such as planes and prime landing slots, there may be some pushback over possible anti-competitive issues and the idea of stripping down one of the U.K.’s pioneering carriers.

“There’s still some doubts over ownership structure and regulatory approval, particularly with this deal potentially getting political attention with EasyJet being a well-known U.K. company,” said Conroy Gaynor, a Bloomberg Intelligence analyst. “Even though we think hurdles can be worked out, a £6.90 price today, with some adjustment for time value of money, would imply about 100% probability of the deal happening, and we certainly are not there.”

EasyJet declined to comment Monday on the share price and the likelihood of a deal going through.

Castlelake LP, a former investor in Scandinavian airline SAS AB, swooped in on EasyJet in May as the carrier was reeling from soaring jet fuel prices and suppressed demand after the Iran war. Prior offers were rejected, with EasyJet calling them “highly opportunistic” and saying the U.S. firm was trying to buy the airline “on the cheap.”

The latest offer gives the airline an equity value of £5.2 billion ($6.9 billion). That valuation increases to £5.5 billion on a fully diluted basis, an EasyJet spokesperson said Sunday.

The new offer is about 6% higher than the previous one of £6.50 per share. In addition, both sides agreed to extend the “put up or shut up” deadline for a firm offer to Aug. 3 at 5 p.m. London time.

“There can be no certainty that any firm offer will be made, even if any pre-conditions are satisfied or waived,” according to the statement. It also said Castlelake has “tremendous respect” for the airline and employees, and intends to support the carrier’s future growth and fleet modernization program.

Alex Irving, an analyst at Bernstein, said “the most likely eventual outcome” is for Castlelake to sell EasyJet’s existing assets primarily to the three European network carriers: Deutsche Lufthansa AG, IAG SA and Air France-KLM. Some of its Airbus SE order book may be sold to non-European airlines, he said.

The two sides have sparred over the potential deal in the past month. The investment firm said EasyJet’s board has shown “unwillingness to engage meaningfully,” taking its bid directly to shareholders.

Castlelake first showed interest in EasyJet on May 29 when a four-week deadline was set. Within that time, the firm offered escalating bids of £5.60, £6.00, £6.25 and then £6.50 — all of which were rebuffed. After the fourth offer, the carrier sought a nine-day deadline extension to July 5 and granted the firm some access to limited commercial information.

EasyJet’s most attractive assets include a fleet of 356 modern Airbus A320 family aircraft; an order book of 287 planes with an additional 100 purchase rights; and prime landing slots in London, Milan and Geneva. It also has a holiday business.

Davy analyst Stephen Furlong said he doesn’t believe Castlelake will break up EasyJet. Rather, the carrier may be slimmed down, with more of its routes focused on serving its holiday offerings.

“In my opinion, this is going to happen,” Furlong said.

Lately, though, the budget carrier has been under pressure from surging jet fuel prices because of the Iran conflict. It reported a loss in the first half of the year as well as a drop in summer bookings.

The company’s biggest shareholder is the family of founder Stelios Haji-Ioannou with a 15.3% stake. The family hasn’t commented publicly.

“I’m sure they recommended partly knowing which way the wind was blowing with Stelios,” Furlong said. “I’m sure Stelios will be part of the Castlelake bid.”

As part of the bid, Castlelake has teamed with Mark Breen and Peter Bellew, who was an executive at EasyJet before leaving abruptly in 2022. The bidding group also includes Brookfield Asset Management Ltd.

As a U.S. entity, Castlelake is unable to gain full control of EasyJet because the airline operates under U.K. and European rules that require majority ownership and control by regional nationals. That means the investment firm needs a partner.

The deal would take private an airline that went public in November 2000 at £3.10, according to data compiled by Bloomberg. Shares reached an all-time high of £15.84 in early 2007 amid an aggressive expansion across Europe.

This story was originally featured on Fortune.com