Castlelake steps up its pursuit of easyJet, moving towards submitting a binding offer
According to Radiocor, the announcement could be made before 3 August, the deadline agreed between the parties for deciding whether or not to proceed
(Il Sole 24 Ore Radiocor)- Castelake is finalising its binding offer for easyJet and could therefore lift its reservations well before 3 August, the deadline – agreed by the parties – by which the American investment firm must either formalise or withdraw its bid. Specifically, according to Radiocor’s report, work is at an advanced stage, reflecting Castelake’s strong interest in Europe’s second-largest airline.
On Sunday 5 July, the boards of directors of the respective companies jointly announced that they had reached an agreement in principle on the key financial terms of a cash takeover bid for the company. The offer, the fifth for Castlelake, involves the purchase of shares not yet held by the US company (which currently holds 2.14 per cent) at a price of £6.90 each in cash, including a partial option for unlisted shares. This represents an increase on the previous offer of £6.50 per share. The fifth proposal, the press release explains, is subject to Castlelake either fulfilling or waiving a series of customary preconditions, including the completion of satisfactory due diligence and the finalisation of the definitive transaction documentation. The final proposal – that is, the binding offer – is in the final stages and, at this point, could be put forward very shortly, before the official deadline of 3 August.
Issues to be resolved
Castelake is also said to be working to resolve a number of issues, starting with the European aviation regulations which require airlines to be owned and majority-controlled by European entities. Then there is the issue of the 0.25 per cent royalty on revenue held by easyJet’s founder, Stelios Haji-Ioannou, which could complicate the deal as he and his family also own 15 per cent of easyJet. In this regard, industry insiders highlight a number of reasons. Firstly, the British company does not own the easyJet brand but uses it under licence from easyGroup, which is a company controlled by Stelios. Under the 2010 licence agreement, the airline pays easyGroup an annual royalty equivalent to 0.25 per cent of its revenue. The agreement has a total duration of 50 years. This means that, even after the acquisition, Castlelake would be expected to continue paying these royalties, unless the contract is renegotiated. Furthermore, as the royalty is calculated on the basis of revenue, it automatically increases as the company grows; for a private equity fund, which aims to increase the company’s value and cash flows, this represents a structural cost that reduces the return on investment. It is therefore on these key issues that the company is working to untangle the situation.
