Why Britain can’t afford to lose easyJet
EasyJet has put up a good fight. Over the past two months, its board has turned down a series of higher and higher offers from Castlelake, a US investment firm with more than $25 billion in assets. On Monday, it finally blinked. The board said it was minded to accept the latest £5.2 billion offer, and serious negotiations will now start to tie up the sale.
There are still obstacles. Castlelake needs to find a way of complying with EU rules that state that airlines based on the continent have to be majority-owned by European shareholders. It will need to be cleared by the British competition regulators. And it will still have to be put to a vote of shareholders. But if those can be overcome, easyJet will disappear into an American firm specialising in asset-based investments, including aircraft leasing.
That is good news for anyone with easyJet shares. The share price has risen by more than 80% since the lows touched in May before the takeover talks were revealed. And Castlelake may well prove a decent long-term owner. But it is a bad deal for the British economy more widely.
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EasyJet is one of the most successful British companies of the past 30 years. It has built one of the best route networks in Europe, with a strong brand, and is well positioned in one of the continent’s fastest-growing industries. With 90 million passengers a year, it is already the fifth largest airline in Europe, just behind Air France-KLM and slightly ahead of Turkish Airlines, and has an unblemished safety record.
Perhaps most importantly, it has carefully positioned itself in the middle of the market. It is a lot cheaper than the traditional national carriers, but it also offers a slightly more civilised experience than the hyper-aggressive approach of Ryanair. It has occupied the middle market, with lowish fairs and acceptable service. For most industries, the middle market is where, over the long run, the most money is made, and there is no reason to think that aviation will turn out to be any different. As European air travel steadily grows, and if its mid-market, low-cost model can be replicated in US or Asian markets, then it also has the potential to grow.
Over the last few years, investors have been far too quick to sell out British companies. In the past few months alone, sugar manufacturer Tate & Lyle has been sold to US rival Ingredion; Intertek has been sold to private-equity firm EQT; and Evoke, the owner of the William Hill betting chain, has been sold to Greek casino operator Bally’s Intralot. This week Sky’s American parent Comcast agreed to buy ITV, Britain’s largest commercial broadcaster. The list keeps getting longer.
EasyJet shareholders should reject the deal
We can all understand why. Britain has become a very hard place to make money. The economy has stagnated, real wages are barely growing and the government is determined to squeeze more tax out of companies wherever possible.
It is surely worth reflecting that if easyJet did not have to pay higher national insurance charges, if rates at airports (a £40 million rise last year at Gatwick, one of its main hubs) had not been increased so much that they were passed on to airlines in landing fees, and if air passenger duty has not gone up by so much (rising another £2 a ticket on short-haul flights in the last Budget) then its profits would have been significantly higher, and it would not have been a target for a takeover in the first place.
Likewise, a moribund, over-regulated stock market means many basically good businesses are undervalued by global standards. One by one they get taken over by foreign rivals and there are no new companies coming along to replace them. Britain’s economic base is steadily getting hollowed out.
Britain can’t afford to lose easyJet. It may not exactly be a national treasure, but it is a decent business with a solid future. If we had lower taxes on businesses, if the stock market was deregulated, and if demand started to grow, British firms would not be quite so vulnerable to foreign predators.
Just for once, perhaps the airline’s shareholders should reject the advice of the board and demand that it remains an independent company listed on the London stock exchange.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
