By Yawen Chen

EasyJet’s LSE:EZJ shareholders are getting a no thrills bet on the company's recovery. The board may recommend U.S. investment group Castlelake's revised 690 pence-a-share offer, which comes at a time when the group's turnaround is only beginning to take off. Much of that extra upside, however, is already reflected in the £5.5 billion pound offer.

It's arguably a strange time to accept a bid. EasyJet's shares have languished since the pandemic, weighed down by falling earnings and a costly fleet renewal. But the group led by CEO Kenton Jarvis should benefit from higher fuel efficiency and margins as nearly 90 new Airbus EURONEXT:AIR aircraft arrive over the next three years. Its package holiday provider arm, meanwhile, aims to almost double annual pre-tax profit to £450 million by 2030. Network optimisation, new slots at Milan Linate and Rome Fiumicino, and technology-driven efficiencies all promise further gains.

Castlelake’s offer, however, still lets shareholders enjoy that improvement today. EasyJet hopes to make more than £1 billion of pre-tax profit in the “medium term”, or around £770 million after tax. The U.S. group’s offer therefore equates to just over 7 times that ambition. Rival airlines, British Airways owner IAG LSE:IAG and Deutsche Lufthansa XETR:LHA, trade on average at just over 5 times 2030 earnings, per Visible Alpha data.

The deal is not yet in the bag. European Union rules require an airline that operates in the bloc to be at least 50% owned by EU investors. Castlelake’s offer therefore leaves a majority slug of equity with two European nationals, former easyJet chief operating officer Peter Bellew, and industry executive Mark Breen. While there’s a danger that the deal falls foul of Brussels, easyJet shareholders have little to lose by going along for the ride with Castlelake.

Another concern is that the U.S. buyer might earn a juicy return, making the decision to sell look silly. It specialises in leasing and financing aviation assets, and so may be able to free up capital by selling off planes or landing slots. Still, its strategy will also involve plenty of risk. Morgan Stanley analysts estimate that a buyer would need leverage of perhaps 5 times EBITDA to make an internal rate of return of 17%. And in the meantime, easyJet will be exposed to the risk of an economic crunch, or further surge in fuel prices. By selling now, its shareholders can enjoy a safe landing.

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CONTEXT NEWS

British budget airline easyJet said on July 5 it was prepared to accept Castlelake's revised bid of £6.90 per share, valuing the group’s equity at £5.5 billion.

EasyJet said Castlelake had agreed to a "best endeavours" commitment to obtain regulatory clearances and approvals.

EasyJet rejected Castlelake's four previous proposals calling them opportunistic attempts to buy the airline "on the cheap" and raised concerns over governance.

Castlelake must now formalise its offer for easyJet by August 3 or walk away under British takeover rules.

EasyJet shares were up 10.9% at £6.18 as of 0720 GMT on July 6.