The easyJet (LSE: EZJ) share price has faced a torrid past week, falling around 30%. This has mainly been due to news of its £1.2bn rights issue, causing a significant amount of dilution. But with the share price under 600p, is it now time to buy easyJet as a recovery stock or has it got further to fall.
The rights issue
Last week, easyJet announced that it would be raising around £1.2bn through the rights issue. Here, participants would be offered the chance to buy 31 shares for every 47 that they own, at a much-discounted price of 410p. This is the second rights issue that easyJet has launched since the pandemic, with the first one raising around £400m.
However, a rights issue is rarely good news for a company’s share price. This is because more shares are available on the market, and the stock price is therefore diluted. Due to the higher number of outstanding shares, valuation metrics such as book value per share and earnings per share, also decrease. Accordingly, it’s no surprise that the easyJet share price has fallen so significantly since this news.
But a rights issue is not just about bad news. In fact, from a long-term perspective, it’s hoped that this extra liquidity will allow the airline to expand its services and take advantage of investment opportunities. It should also help easyJet withstand the “potential prolonged market challenges”, especially if travel restrictions continue into 2022.
Alongside the rights issue, shareholders have also had to deal with the news that it has been approached by a competitor for a potential buyout. The competitor is widely thought to be Wizz Air. Nonetheless, it was reported that it was a “low premium and highly conditional” all-share deal, which “significantly undervalued” the group. As such, the deal was rejected instantly. Even so, it refused to rule out any further M&A, either as a target or an acquirer. This may mean further bids for easyJet in the future, which may value the firm more highly. Hopefully, this would have a positive effect on the easyJet share price.
After reporting a headline loss of £835m in 2021, there are also signs that a recovery is in progress. In fact, the group expects capacity this quarter will be 60% of 2019 levels, up from 17% in Q3. There are equally signs that travel regulations in the UK will start to ease in the coming weeks, with Health Secretary Sajid Javid stating that he wants to remove the PCR test requirement for those entering the UK “as soon as [he] possibly can”. This will hopefully aid easyJet’s recovery.
What am I doing about easyJet shares?
I’m optimistic that the recovery is under way for easyJet. This should be aided by ever-increasing passenger numbers. But I’m not going to buy right now. This is because the rights issue means that easyJet will have almost 750m shares in issue, compared to just 397m before the pandemic. I’d like to see signs that the company is in a financial position to buy back some of these shares before I buy.
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Stuart Blair 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.
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