Air Canada says it will go ahead with its plan to buy smaller rival Air Transat, but it will pay more than 70 per cent less than it first agreed to.
The two companies said in a release over the weekend that Air Canada will buy all outstanding shares in Transat for $5 a piece, for a total purchase price of $180 million.
That’s a far cry from the $18 per share that Air Canada agreed to pay in late 2019, which was at the time the culmination of a lengthy bidding process for the smaller travel company.
But that was before the COVID-19 pandemic walloped demand for air travel, sending valuations for airlines plummeting.
“COVID-19 has had a devastating effect on the global airline industry, with a material impact on the value of airlines and aviation assets,” Air Canada CEO Calin Rovinescu said.
“Nonetheless, Air Canada intends to complete its acquisition of Transat, at a reduced price and on modified terms.”
The press release made no mention as to whether or not the new purchase price is acceptable to some major Transat shareholders, including the Quebec pension plan known as The Caisse, and money managers Letko, Brosseau and Associates and PenderFund Capital Management, who combined own almost one quarter of Transat’s shares.
Those investors were believed to have been a major roadblock to the original plan, until Air Canada upped their offer to make it worth their while.
Requests for comment to those stakeholders as to whether or not they support the new plan were not immediately returned.
Shares move higher on news
The reassurance from Air Canada gave some support to Transat shares, which have been selling off sharply on fears that the takeover would be scrapped entirely.
Anlayst Tim James at TD Bank says Air Canada must have been losing the motivation to go through with the deal, until Transat agreed to the lower price.
“We believe that the size of the price revision indicates that Transat could be in a weaker financial condition than anticipated, or that Air Canada was content to let the deal expire, or a combination of both, leading to a willingness by Transat to accept such a large price adjustment,” he said.
But Krista Friesen, Jessica Zhang and Kevin Chiang with CIBC said at the new price, the deal could turn out to be a win for both sides.
“We do see an opportunity for Air Canada to come out of this in a stronger position given its leading market share, the strength of its balance sheet heading into this crisis, its cost-cutting initiatives and its operational adjustments,” they said.
“All these factors should allow it to recover faster than its domestic peers. As such, having the option to convert their [Transat] share for AC shares should be viewed positively by [Transat] shareholders looking to partake in the airline recovery.”
Transat shares gained almost $1 on the TSX to change hands at $4.77. Last summer, they traded above $16 a share.
Despite the assurances from the two companies, the deal is still far from certain.
Shareholders, courts, stock exchanges and regulatory bodies including Canada’s Competition Bureau — which has already warned it thinks the deal could be bad for consumers — must still give their OK.
If all those approvals are met, Air Canada said it expects the deal to be finalized in January or February.