EasyJet Rejects Takeover Offer and Announces GBP 1.20 Billion Rights Issue

No-moat EasyJet rejected a takeover offer and announced a GBP 1.20 billion rights issue. Media reports by Bloomberg suggested the “unnamed” bidder is low-cost rival Wizz Air, which has made no secret of its ambitions to gain share at EasyJet’s Gatwick hub. Wizz Air, who has reportedly backed off from any further bids, also shares a common fleet of Airbus A320 aircraft with EasyJet. The proceeds of the 31 for 47 rights issue, which is priced at GBX 410, will be used to strengthen the group’s balance sheet and provide flexibility to act on growth opportunities that arise during the recovery. The rights issue comes as somewhat of a surprise to us given the group had GBP 2.90 billion of liquidity available at the end of June 2021, which suggests cash generation was weaker than expected over summer. Existing shareholders will need to fork out an additional 35% approximately, of their existing position at prevailing prices to avoid dilution. Shares are trading 10% down on the announcement and the theoretical ex-rights price of GBX 625 compares with our theoretical ex-rights fair value estimate of GBX 765 (based on our GBX 1,070 fair value estimate) per share, which suggests the share still offers upside. We continue to prefer Wizz Air, which has a superior growth outlook at a higher discount to fair value.