The Motley Fool

Making sense of easyJet’s Rights Issue

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.

One Killer Stock For The Cybersecurity Surge

Cybersecurity is surging, with experts predicting that the cybersecurity market will reach US$366 billion by 2028more than double what it is today!

And with that kind of growth, this North American company stands to be the biggest winner.

Because their patented “self-repairing” technology is changing the cybersecurity landscape as we know it…

We think it has the potential to become the next famous tech success story. In fact, we think it could become as big… or even BIGGER than Shopify.

Click here to see how you can uncover the name of this North American stock that’s taking over Silicon Valley, one device at a time…

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.

One FTSE “Snowball Stock” With Runaway Revenues

Looking for new share ideas?

Grab this FREE report now.

Inside, you discover one FTSE company with a runaway snowball of profits.

From 2015-2019…

  • Revenues increased 38.6%.
  • Its net income went up 19.7 times!
  • Since 2012, revenues from regular users have almost DOUBLED

The opportunity here really is astounding.

In fact, one of its own board members recently snapped up 25,000 shares using their own money...

So why sit on the side lines a minute longer?

You could have the full details on this company right now.

Grab your free report – while it’s online.

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.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.