Transat A.T. Inc’s board of directors has approved Air Canada’s takeover offer valued at $520 million, but several hurdles remain before the transaction can be approved, including concerns about competition.
The deal, announced Thursday following a 30-day negotiating period, will see Air Canada purchase outstanding shares of Transat, an airline and travel tour operator, for $13 a share. Canada’s largest airline said it will keep Transat’s brands intact, while also maintaining its head office and key functions in Montreal. Executives from Air Canada and Transat said the transaction was the best possible outcome for both companies.
But the offer still faces shareholder and regulatory hurdles before it can be finalized. Transat needs to obtain shareholder approval from two-thirds of its investors, and some of its biggest shareholders have expressed disapproval of Air Canada’s offer. Letko, Brosseau and Associates and PenderFund Capital Management, which jointly own a 21.1 per cent stake, have said they would vote against the agreement if the purchase price remained at $13 a share.
The deal is also expected to face a Competition Bureau review looking at the potential impact on competition, airfares and job maintenance, as well as a review conducted by the Minister of Transport to ensure the agreement is in the “public interest.”
“The issue around competition is perhaps the largest risk to a deal being completed,” National Bank analyst Cameron Doerksen wrote in a note to clients shortly after the deal was first unveiled on May 16.
Air Canada’s share of seat capacity in the trans-Atlantic market would grow from 42 per cent to 60 per cent with Transat under its wing, according to National Bank’s analysis. When it comes to seat capacity to sun destinations, which includes the Caribbean and Mexico, Air Canada’s share of the market would jump from 24 per cent to 46 per cent.
However, Doerksen believes Air Canada will be able to argue that there are new competitors emerging in different markets, reducing the impact of the acquisition.
“We believe Air Canada can argue that competition is growing and there are few restriction to prospective competitors beyond certain slot-restricted airports such as Heathrow, where Transat does not fly anyway,” Doerksen wrote in May.
Air Canada faces ‘regulatory minefield’
Robert Kokonis, president of Toronto-based consulting firm AirTrav Inc., said in an interview that he believes the results of a potential Competition Bureau review will likely include contingencies – for example, that perhaps Air Canada gives up some slots at specific airports – that must be enforced before an acquisition takes place.
“I think it will go through regulatory process for sure, and that there is an extremely high likelihood that there will be conditions attached,” Kokonis said.
While Air Canada received approval to acquire Canadian Airlines International in 2000, Raymond James analyst Ben Cherniavsky noted in a May 16 report that the airline industry has evolved substantially since then and is more profitable today.
“The government these days has been much more interested in protecting the consumer (see the Passenger Bill of Rights) and encouraging more competition (see the recent changes to limits on foreign investments) than helping the incumbent airlines,” he wrote.
“It is hard to see how a merger of Air Canada and Transat will facilitate either of these goals, especially for Quebecers.”
According to Cherniavsky, Air Canada’s share of seats flying from Montreal’s Pierre Elliott Trudeau International Airport would increase from 50 per cent to 60 per cent with Transat now under its wing. Air Canada’s share of seats from Montreal and Quebec City to Cancun would jump from 29 per cent now to 62 per cent post-takeover.
“Beyond the regulatory minefield that Air Canada must manage through this process, there is also substantial execution risk to consider if this acquisition is approved and moves forward,” Cherniavsky wrote, pointing to previous airline mergers that were “notoriously complex, time-consuming and risky.”
“Whatever the intent, we see a hornet’s nest of complexity associated with this acquisition.”
Still, Air Canada’s chief executive Calin Rovinescu said in a statement that the deal is “the best possible outcome” for all stakeholders.
“For shareholders of Transat and Air Canada, this combination delivers excellent value, while also providing increased job security for both companies’ employees through greater growth prospects,” he said.
Analysts tend to agree when it comes to growth prospects. Doerksen said an acquisition of Transat would be a positive for Air Canada, with the potential for meaningful cost and revenue synergies. Altacorp Capital analyst Chris Murray said in a note to clients Thursday that the transaction was “positive for all stakeholders” and will enhance earnings for Air Canada going forward.
With files from the Canadian Press