The easyJet (LSE:EZJ) share price has been one of the most dramatic stories in the FTSE 250 this year. Between January and mid-May, the shares fell around 33%. Then, in the space of just four weeks, they surged by over 40%.
What on earth happened? And should I be considering this airline for my portfolio?
Why did the shares initially tumble?
The sell-off was largely rooted in the Middle East conflict. When fighting escalated sharply in March, jet fuel prices spiked violently. Then in easyJet’s half-year trading update, published in April, management had confirmed that the rise in fuel costs alone added around £25m of unplanned expenses.
Combined with other headwinds, management warned that full first-half headline losses are expected to land between £540m and £560m – significantly behind prior analyst expectations.
With that in mind, it’s no wonder the easyJet share price took a tumble. But then why did it suddenly start bouncing back?
What sparked the recovery?
easyJet’s sudden rally wasn’t caused by a miraculous operational recovery. Instead, this newfound momentum stems from an opportunistic takeover bid.
On 29 May, US private equity firm Castlelake confirmed it was in the early stages of considering a possible offer for easyJet. A follow-up disclosure two days later revealed that Castlelake already holds 2.14% of easyJet’s issued shares, making it one of the largest single shareholders.
But this is where things get interesting…
Under the rules of the UK Takeover Code, Castlelake cannot offer less than 403.23p per share because of the price it paid to acquire its existing position. This essentially sets the floor of a potential buyout price. And since investors expect a far more generous offer to be made, the easyJet share price has since climbed even higher.
While the prospect of a takeover is certainly exciting, it’s important to highlight that no bid has officially been issued yet. And Castlelake has until 26 June to make up its mind.
Time to buy?
If the proposed acquisition price is significantly ahead of where easyJet shares currently trade, buying shares today could unlock significant short-term gains. The only problem is, this is pure speculation. There’s no guarantee an offer will be made or that management will accept if Castlelake does indeed decide to pull the trigger.
However, putting this takeover story aside, easyJet as a business seems to be structurally sound. The company holds net cash of £434m, has access to £4.7bn in liquidity, and owns 86% of its fleet outright. Summer bookings are 63% sold and the holidays division is also delivering 22% customer growth year on year.
In other words, easyJet isn’t struggling due to a lack of demand, but rather runaway fuel prices. The company has hedged around 70% of its fuel at a price of $706 per metric tonne compared to the $1,500 spot price. But hedges don’t last forever. And for every $100 increase in average fuel costs, easyJet estimates £40m of additional expenses will be incurred.
So what should investors make of all this? The easyJet share price is caught between genuine operational headwinds and a potentially opportunistic takeout story. That is a fascinating but uncomfortable combination for investors.
And for my portfolio, it’s not a stock I’m rushing to buy even with a possible takeover coming around the corner.
Should you invest £5,000 in easyJet Plc right now?
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Zaven Boyrazian does not hold any positions in the companies mentioned.
