Last week, investor interest in easyJet (LSE: EZJ) shares surged after it emerged the company had received an “unsolicited preliminary takeover approach” from another airline.
Wizz Air was soon identified as the potential acquirer. The low-cost airline rejected the offer as it undervalued the company, according to reports.
Are easyJet shares a target?
I think this could be a sign of things to come. The pandemic has decimated airlines around the world, and many are struggling to survive. This isn’t going to change any time soon. The airline industry worldwide has always been plagued by low-profit margins, volatile costs and fare wars.
To escape this vicious circle, airlines need to grow and build economies of scale. IAG is a great example, although the company is struggling almost as much as other airlines right now.
I’m not the only one who holds this view. Ryanair boss Michael O’Leary believes airlines such as Wizz and easyJet need to merge to survive after the pandemic.
He first made these comments towards the end of 2020, saying: “I think the jury is out at the moment as to whether easyJet survives longer term as an independent airline, given its very high cost base, or whether Wizz overtakes it or maybe Wizz merges with easyJet and forms a fifth competitor.“
He reiterated this stance last week. easyJet has tried to offset concerns about its financial position by raising £1.2bn from the market through a new share issue.
However, in the long term, the structural issues that are causing the company problems, such as its high cost base, will hold back easyJet shares. These issues could also make the investment more attractive to potential acquirers.
I should point out at this stage that there’s no guarantee a merger will occur, and neither company has said they’ve returned to the negotiating table.
Nevertheless, consolidation makes a lot of sense for an industry struggling with the challenges outlined above.
A long-term investment?
A potential buyout doesn’t necessarily make easyJet shares attractive from an investment perspective. The acquirer could pay a premium for the business, or it could pay in stock. This may produce a positive result in the long run if the enlarged entity returns to growth. Of course, this is far from guaranteed.
Still, I’m inclined to say a merged Wizz-easyJet would be an attractive investment. Wizz has gone from strength to strength over the past few years. It has lower costs and a stronger balance sheet. If it can transpose these positive factors onto easyJet, the enlarged company could come out on top.
Due to the challenges of the pandemic, and the airline industry in general, and while I believe easyJet shares could produce a positive return in the best-case scenario, I wouldn’t buy the stock today. I think the company’s outlook’s just too uncertain.
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Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Wizz Air Holdings. 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.