EasyJet to buy Go for $525 million

EasyJet on runway to dominate budget airline market in Europe

LONDON, England (CNN) -- Britain's easyJet has agreed to buy rival Go-Fly for £374 million ($525 million) to create Europe's biggest budget airline.

The move will end Ryanair's 10-year grip on the sector and comes at a time when "no-frills" carriers have seen passenger numbers soar. EasyJet (EZJ) and Ryanair (RYA) expected annual passenger growth of 25 percent.

In contrast, rival traditional carriers like British Airways (BAY) and Lufthansa have seen passenger numbers decline on European routes.

Go was set up by British Airways in 1998 but was sold last June to a management buyout team and the venture capitalist 3i for £110 million. Last week, easyJet struck an agreement to buy British Airway's loss-making German domestic carrier as it drives to dominate the European no-frills market.

EasyJet's stock rose 2.4 percent to 473 pence after it paid less for Go than analysts had expected. Analysts had been looking at a price in the range of £400 million to £600 million

The Luton-based company, which was established seven years ago by outgoing Chairman Stelious Haji-Ioanna, said it would fund the acquisition through the sales of new shares to existing shareholders worth £277 million.

The shares will be sold at 265 pence each, and investors can take up four new shares for every 11 they currently own.

But the takeover marks the end of road for another high-profile entrepreneur, Go chief executive Barbara Cassani, who has been credited with building the airline. She has decided to leave the company.

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Cassani had been unhappy that 3i had rejected her proposal to float the company. 3i owns two-thirds of Go, while Cassani had a 4 percent stake. EasyJet had said it offered Cassani the No. 2 spot at the airline, but Cassani said no such offer had been made.

Go is profitable and flew 4.3 million passengers, generating profit before tax of £17 million in the year to March 31, 2002. EasyJet carried 8.4 million passengers over the last year.

"Combining these two businesses into one very strong low-cost carrier is a very big step forward,'' easyJet chief executive Ray Webster said, pledging that fares would not rise as a result.

"This is an opportunity to keep prices low. We need low fares to stimulate the market we are developing.''