Air Canada could be eyeing exit plan from Transat deal: analysts
Analysts believe Air Canada may be looking for an escape hatch to exit its proposed $720-million acquisition of Transat A.T. Inc., after coronavirus crushed the airline sector and dimmed prospects of passengers boarding planes with any frequency any time soon.
Le Journal de Montreal reported Tuesday, citing three anonymous sources, that Air Canada wants the federal government to block the purchase as it awaits a final decision from Transport Minister Marc Garneau.
Air Canada did not confirm or deny the media report.
“At this point we are awaiting the outcome of ongoing regulatory reviews and so are unable to offer a comment,” Patrick Fitzgerald, an Air Canada spokesman, wrote in an email to the Financial Post.
Transat declined to comment, but said on May 25 it expects the deal to close in the fourth quarter.
The acquisition of Montreal-based Transat, a regional carrier, was seen as a way for Air Canada to extend its domestic network and capture more flights out of regional hubs. But the environment has changed dramatically and Air Canada’s hesitancy, according to the media report, underscores the far reaching economic impacts of the coronavirus epidemic.
It would be a remarkable reversal as Air Canada spent the past year pushing for approval of the purchase, even sweetening its initial cash offer of $13, made last June, to $18 per share in August — a 38-per-cent increase. Transat’s share had been trading around $5 weeks before the deal was announced, suggesting that the final offer represented a 260-per-cent premium — considered one of the highest ever in the airline industry.
Air Canada’s share price, which hovered around $40 per share last August, rose 7.7 per cent on Wednesday to $17.99, while Transat declined 2.43 per cent to $6.42.
David Ocampo, an analyst at Cormark Securities, Inc., said he questions whether Air Canada still wants to go through with the deal.
“Right now, they’re just in cash preservation mode,” Ocampo said, adding that Air Canada has recently started moving some cargo while its passenger fleet remains idle.
On Tuesday, the company announced a $1.6-billion financing raised from the sale of shares and debt for working capital and other corporate needs.
The all-cash purchase of Transat would eat up nearly half of that cash, noting that the airline industry remains in poor shape even as social distancing policies ease and summer begins, said Ocampo. Air travel is projected to remain down 75 per cent from previous periods by his calculations.
Air Canada could try to terminate the deal under a “force majeure” clause — a legal term for unforeseeable circumstances — but it would need to show Transat was disproportionately affected by the pandemic compared to other airlines, Ocampo said. “That’s tough to prove out.”
Instead, he predicted that if the federal government asks for any concessions from Air Canada as a condition of approval for the deal, the airline could use it as a reason to walk away from the deal.
The merger, which has been approved by Transat shareholders and its board, was always likely to face close scrutiny from competition regulators, who in March concluded that eliminating an industry rival would result in higher prices and fewer services for Canadians.
Air Canada recently said it was losing $20 million per day despite broad layoffs. In May, it announced an abridged summer schedule with around 100 destinations, down from 220 last year.
Robert Kokonis, managing director of Air Trav Inc., a Toronto-based aviation advisory firm, said he does not believe Air Canada wants a merger in the current business climate.
“I just can’t imagine, right now, Air Canada being desirous of approving that transaction,” said Kokonis, “both from their shareholders, from their labour, (or) from a treasury perspective.”
Transport Canada, which in May completed an evaluation of whether the merger would serve the public interest, declined to comment for this article, as did the Competition Bureau.
Kokonis said he expects Garneau to make a decision by late June.
Meanwhile, European regulators launched a probe into whether the deal will reduce competition.