Transat agrees to be bought by Air Canada for $520-million; shares slide

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Transat A.T. Inc. has agreed to a $520-million takeover by Air Canada, but one major shareholder said the offer is too low and urged rival bidders to renew their efforts.

The all-cash deal, worth $13 for each Transat share, comes after 30 days of exclusive talks between the two airlines and is expected to be completed by 2020, the companies said in a joint statement on Thursday morning.

The deal requires the backing of two-thirds of Transat investors, as well as court and government approvals. Large Transat shareholders criticized the offer after it was proposed on May 16, saying it undervalued the company and was ill-timed.

Support from three large Transat investors based in Quebec is key to the deal’s approval.

Montreal-based Letko, Brosseau & Associates, which owns 17 per cent of Transat, according to the latest available filings, said in May that it opposed the deal. Founder Peter Letko was not available on Thursday.

Patrick McQuilken, a spokesman for the Fonds de solidarité FTQ, which owns 12 per cent of Transat, said the labour-sponsored fund is awaiting the formal offer to shareholders, which will reveal more details. “Above financial considerations, the Fonds will also look at different factors, including the headquarters in Montreal, the activities around those headquarters, and the jobs,” Mr. McQuilken said.

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A spokesman for Caisse de dépôt et placement du Québec, which owns 6 per cent, declined to comment.

Vancouver-based PenderFund Capital Management Ltd., which is Transat’s fifth-biggest shareholder at 4 per cent, reiterated its opposition to the offer on Thursday.

2018 Market share for

international flights

To and from Canada*

KLM:

5%

Cathay P.:

4%

Transat:

9%

WestJet:

5%

Sunwing:

4%

Luthansa:

3%

Air Canada:

41%

British:

2%

Other:

25%

China E.:

2%

*Estimated Air Canada scheduled capacity together with its

contracted carriers. Data based on available seat miles (ASM)

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE:

air canada 2018 Annual Information Form

2018 Market share for international flights

To and from Canada*

KLM:

5%

Transat:

9%

WestJet:

5%

Cathay P.:

4%

Sunwing:

4%

Luthansa:

3%

Air Canada:

41%

British:

2%

Other:

25%

China E.:

2%

*Estimated Air Canada scheduled capacity together with its contracted

carriers. Data based on available seat miles (ASM)

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: air canada

2018 Annual Information Form

2018 Market share for international flights

To and from Canada*

KLM:

5%

Transat:

9%

WestJet:

5%

Cathay P.:

4%

Sunwing:

4%

Luthansa:

3%

Air Canada:

41%

British:

2%

Other:

25%

China East.:

2%

*Estimated Air Canada scheduled capacity together with its contracted carriers.

Data based on available seat miles (ASM)

JOHN SOPINSKI/THE GLOBE AND MAIL, SOURCE: air canada 2018

Annual Information Form

Amar Pandya, a senior investment analyst at PenderFund, urged other suitors, Montreal real estate developer Group Mach Inc. and FNC Capital of Montreal, to work with Air Transat’s board.

“The Air Canada offer doesn’t fully reflect the value of Transat,” Mr. Pandya said by phone. “We think this is Air Canada negotiating hard.”

Group Mach has said it approached Transat several months ago, and recently offered $14 a share, intending to expand the airline’s sun-destination business along with a Spanish partner.

Alfred Buggé, vice-president of Mach, said he cannot understand why the Transat board would recommend the Air Canada offer. “They’re going for a lower offer of $13, and this bid is so riddled with question marks,” he said, citing a lack of clarity on preserving jobs and on addressing antitrust concerns. He added no mention was made about whether the deal has the support of the big three Quebec shareholders.

Both Mr. Pandya and Mr. Buggé said the deal would pay an amount that is less than the cash on Transat’s balance sheet.

The agreement recommended by the Transat directors includes a $15-million fee payable to Air Canada should Transat later accept a cash offer worth $14 or more that Air Canada does not match. If government or regulators reject the deal, Air Canada will pay Transat up to $40-million.

Canada’s Commissioner of Competition is expected to examine the takeover closely, given that the two airlines combined have 60 per cent of cross-Atlantic travel from Canada, 45 per cent of some Caribbean routes, and much of the Montreal air-travel market.

Air Canada said it intends to preserve Transat jobs and the Montreal headquarters, and offer better growth prospects for an airline struggling through a shift to expand its vacation hotel business.

“This fully funded cash transaction is the ideal platform for Transat’s presence and jobs in Montreal, and therefore represents the best option for all our stakeholders: employees, suppliers, partners and shareholders," Jean-Marc Eustache, co-founder and chief executive officer of Transat, said in a news release. "For our clients, it will offer even more choices and possibilities.”

Co-founded in 1987 by Mr. Eustache, Transat has 5,000 employees and about 40 planes serving 26 countries, primarily holiday spots.

Air Canada employs 36,000 people, flies about 190 planes and serves more than 220 destinations. Its discount brand, Rouge, operates 53 passenger jets, and its regional carrier, Air Canada Express, has about 150 smaller planes.

Transat is renewing its fleet, adding fuel-efficient, long-range Airbus A321 Neos, and plans to expand its vacation-hotel business, spending US$750-million to own or operate 5,000 hotel rooms at major sun destinations by 2024.

Amid the transition, Transat has lost money, measured by adjusted profits, in two of the past three years, and is expected to be in the red in 2019.

However, analysts say its move toward a newer, all-Airbus fleet adds to its strategic appeal for Air Canada at a time when the bigger carrier’s 24 Boeing 737 Max jets are grounded – along with all others around the world – after two recent crashes killed 346 people.

Rick Erickson, an independent aviation consultant in Calgary, said the takeover is a defensive move by Air Canada to get Transat out of the reach of rival WestJet Airlines Ltd., which is expanding internationally.

Mr. Erickson said Air Canada’s discount brand, Rouge, would mesh nicely with Transat. “Rouge is essentially a big competitor to Transat right now, and to have the two of them merged together is really a very strong transatlantic low-cost play for Air Canada as a whole, and will support what Air Canada would otherwise try to do on its own anyway,” he said.

Walter Spracklin, an analyst at Royal Bank of Canada, said in a note to clients on Thursday the deal was a “slight positive” for Air Canada’s share price and would boost Air Canada’s vacation division.

Mr. Spracklin said Transat’s reasons for accepting the lower Air Canada bid were that it is all-cash and fully funded, and the merits of selling to a non-airline company are not clear. It also said Transat’s board favours Air Canada’s bigger platform and the plan to preserve the brand, employment and head office in Montreal.

Onex Corp. on May 13 announced a friendly, $3.5-billion takeover of WestJet. The federal Transport Minister has cleared that deal, but court approval is required, and the support of two-thirds of WestJet shareholders in a vote on July 23.

With reports from Jeff Jones and Nicolas Van Praet