Making sense of easyJet’s Rights Issue

Many investors fled for the hills when easyJet announced its Rights Issue.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You’ve probably experienced one of those moments on a plane when it suddenly drops and your stomach turns a somersault.

I’d imagine plenty of easyJet (LSE: EZJ) investors had a similar feeling last Thursday when they saw the value of their shares dive by double digits. It followed an unscheduled announcement by the company, and clearly many shareholders responded by hitting the ‘sell’ button.

I don’t own easyJet shares, but if I did — and as a follower of Foolish investing principles — my first response would have been: “Don’t panic.” I’d want to take time to calmly assess the new information. What does it mean for the company, its prospects and its valuation? And how does it now fit with my personal investment objectives?

Shares at a 48% discount

There were three parts to easyJet’s announcement. First, the launch of a Rights Issue to raise £1.2bn. Second, a trading update. And third, news that the company had received — and rejected — a takeover approach.
 
The market’s negative response to the announcement was down to the Rights Issue, because there was little of note in the trading update and news of a possible bid for a company is generally positive for its share price.
 
easyJet is offering shareholders the right, but not the obligation, to buy 31 new shares for every 47 shares they own. The share price prior to the announcement was 789p, but shareholders will pay just 410p per share for the new shares — a 48% discount.
 
What does this mean for the value of the company?

TERP

Before the announcement of the Rights Issue, the market was valuing easyJet at £3,604m (share price of 789p x 456.75m shares in issue). We need to add the £1,235m being raised in the Rights Issue, which the market didn’t know about at the time, giving a value of £4,839m.
 
The Rights Issue will add a further 301.26m shares to the share count. If the market were to still value easyJet at £4,839m, the share price would have to be 638p (x 758.01m shares in issue). That 638p is known as the theoretical ex-rights price (TERP).

Of course, ultimately the price may trade higher or lower than the TERP, depending on how the market views the prospects of the business in light of the Rights Issue and any other news. But the TERP provides investors with a useful baseline from which to work.

Killing a number of birds with one stone

easyJet’s Rights Issue provides extra security “should the COVID-19 pandemic continue to dampen or delay the recovery of passenger volumes over the next 12 months.” It has also given lenders more confidence in the company. Conditional on the Rights Issue, easyJet has secured additional liquidity in the form of a new four-year revolving credit facility of $400m.
 
The company also believes the proceeds of the Rights Issue materially improve its ability “to take advantage of long-term strategic and investment opportunities expected to arise as the European aviation market emerges from the COVID-19 pandemic.”
 
Additionally, the board was able to present its ability to pursue such opportunities as one of the reasons to reject the takeover approach it received. It said the potential bidder (widely reported to have been Wizz Air) is no longer considering making an offer.
 
In summary, the Rights Issue has enabled easyJet to kill a number of birds with one stone. It’s strengthened its balance sheet, given it firepower to pursue growth opportunities, and helped it see off an unsolicited takeover approach.

What does the future hold?

It looks as if the European aviation market is heading for a once-in-a-generation shake-up, and that financially strong companies could take advantage of this. The question for easyJet investors is: how much shareholder value can the company add for the price of a £1.2bn fundraising and large increase in the number of shares?
 
Prior to the announcement of the Rights Issue, City analysts were expecting easyJet’s business to have fully recovered by its financial year to September 2023. Consensus net income was pencilled-in for £460m. Based on the pre-Rights-Issue number of shares, that would represent around 100p per share. Based on the post-Rights-Issue number of shares it would be about 60p.
 
Hopefully, all this gives you some perspectives on what the Rights Issue means for easyJet. Only you can decide whether its prospects and valuation are attractive, and whether the post-Rights-Issue company will fit with your personal investment objectives.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

As analysts cut price targets for Lloyds shares, should I be greedy when others are fearful?

As Citigroup and Goldman Sachs cut their price targets for Lloyds shares, Stephen Wright thinks the bank’s biggest long-term advantage…

Read more »

Investing Articles

Is passive income possible from just £5 a day? Here’s one way to try

We don't need to be rich to invest for passive income. Using the miracle of compounding, we can aim to…

Read more »

Middle-aged black male working at home desk
Investing Articles

If an investor put £20k into the FTSE All-Share a decade ago, here’s what they’d have today!

On average, the FTSE All-Share has delivered a mid-single-digit annual return since 2014. What does the future hold for this…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

One FTSE 100 stock I plan to buy hand over fist in 2025

With strong buy ratings and impressive growth, this FTSE 100 could soar in 2025. Here’s why Mark Hartley plans to…

Read more »

Investing For Beginners

If a savvy investor puts £700 a month into an ISA, here’s what they could have by 2030

With regular ISA contributions and a sound investment strategy, one can potentially build up a lot of money over the…

Read more »

artificial intelligence investing algorithms
Investing Articles

2 top FTSE investment trusts to consider for the artificial intelligence (AI) revolution

Thinking about getting more portfolio exposure to AI in 2025? Here's a pair of high-quality FTSE investment trusts to consider.

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Do I need to know how Palantir’s tech works to consider buying the shares?

Warren Buffett doesn’t know how an iPhone works. So why should investors need to understand how the AI behind Palantir…

Read more »

artificial intelligence investing algorithms
Investing Articles

Can investors trust the National Grid dividend in 2025?

National Grid surprised investors this year with a dividend cut to help fund upgrades. Is this FTSE 100 stalwart still…

Read more »