Canada Markets closed

Air Canada in exclusive talks to buy Transat in $520-million deal

Air Canada (AC.TO) is in talks to buy airline and travel tour operator Transat A.T. Inc. (TRZ.TO) for about $520 million, a deal that was viewed positively by many analysts and sent shares of both companies soaring.

Canada’s largest airline said in a statement released Thursday morning that it was interested in purchasing all outstanding shares of Transat for $13 per share, a 23 per cent premium on its closing price Wednesday. In a separate statement Transat said it has agreed to a 30-day period of negotiations with Air Canada, but that there is no assurance that a definitive agreement will be reached.

Transat’s chief executive Jean-Marc Eustache said that the announcement was “good news” for the company.

“This is an opportunity to team up with a great company that knows and understands our industry and has had undisputable success in the travel business,” he said in a news release.

“This represents the best prospect for not only maintaining, but growing over the long term the business and jobs that Transat has been developing in Quebec and elsewhere for more than 30 years.”

Air Canada chief executive Calin Rovinescu said the combination of the two brands would create a “global leader in leisure, tourism and travel.”

“The acquisition presents a unique opportunity to compete with the very best in the world when it comes to leisure travel,” Rovinescu said in a statement.

Transat shares closed Thursday at $12.00 in Toronto, an increase of 13.42 per cent. Air Canada reached an all-time high of 40.40, a jump of 3.91 per cent.

TRZ.TO

While the deal has not been finalized and would still require regulatory and shareholder approval, analysts have viewed the potential transaction as positive for both companies.

Walter Spracklin, an analyst at RBC Capital Markets, said the deal was “not overly surprising” but unexpected nonetheless. He wrote in a note to clients Thursday that he viewed the deal favourably because it will improve Air Canada’s position in a highly competitive leisure market, as well as increase scale for Air Canada Vacations, the airline’s travel tour business. It would also give Air Canada access to Air Transat’s fleet of Airbus A321s at a time when aircraft capacity is strained due to the grounding of the Boeing 737 Max 8.

AltaCorp Capital analyst Chris Murray said the potential transaction is positive for Air Canada and Transat, which had specifically been looking to diversify its operations in recent years.

“The core of Transat’s business has historically been about packaged travel. When you see the disintermediation of that whole space by the internet, as well as a number of new competitors in the business like WestJet and Sunwing, the marketplace has changed,” AltaCorp Capital analyst Chris Murray said in an interview.

“They’ve been trying to figure out various strategic options for the last few years… so I think this is a good outcome for everybody.”

Competition questions the biggest hurdle

Transat had announced last month that it had held preliminary talks about a potential sale of the business with “more than one party”, which sent the company’s stock skyrocketing. The announcement, and now the potential Air Canada deal, comes as the company undergoes a transformation that includes the launch of a new hotel division.

But what Air Canada wants to do with Transat’s hotel division remains to be seen. Spracklin said that Air Canada’s management team indicated that it has not come to a decision on Transat’s hotel operations.

“Transat has agreed to limit any undertakings and expenses relating to a hotel strategy during this period,” he said. “We believe this reflects the possibility that Air Canada may seek to exit this aspect of Transat’s operations in the deal is successful.”

In addition to the due diligence review Air Canada will be undertaking over the next few days, analysts expect the deal will be subject to regulatory and shareholder approvals as well as a competition bureau review.

“Competition is going to likely be the biggest piece of the regulatory hurdle here,” Murray said, adding that Air Canada will likely argue that the deal will help the airline expand its offerings to passengers by growing its route network.

“The other piece of it will be that there are still other competitors in the marketplace, such as WestJet and Sunwing,” Murray said.

“I think the competition bureau review will be fulsome and complete, but I believe ultimately manageable.”

The potential takeover comes just a few days after it was announced that Onex Corp. is buying WestJet Airlines Ltd. for $5 billion and taking Canada’s second-biggest airline private.

Yahoo Finance Canada Morning Brief