May 16, 2019

Air Canada to acquire leisure operator Traansat

Loss-making Transat AT is in exclusive talks with Air Canada, which is offering $13 per share to buy the travel company.

The Montreal-based owner of Air Transat and other travel businesses has been approached by several parties.

Transat, however, announced on 16 May a 30-day period of exclusive negotiations on a sale of the company with Air Canada.

Air Canada already flies into Transat’s markets, so integrating the two businesses could be relatively easy.

Air Canada’s Rouge low-cost unit has hurt Transat on core Caribbean and European routes.

Air Canada has separately valued the offer at CAD520 million ($387 million).

Transat offers vacation packages, hotel stays and air travel under the Transat and Air Transat brands.

Transat first disclosed preliminary talks regarding a possible sale of the company in April, without disclosing the identities of potential bidders.

… Air Canada is natural fit for Transat

The list of potential buyers, however, is constrained, as foreign ownership of Canadian air carriers is limited to 49%.

Transat’s main shareholder is Montreal-based investment manager Letko, Brosseau and Associates with an 18.14% stake and Quebec Federation of Labour’s Solidarity Fund, holding 11.58%.

Caisse de depot et placement du Quebec holds a 5.84% stake.

Letko, Brosseau also is the largest shareholder in Air Canada and the second-largest in WestJet, after Toronto-based Fairfax Financial Holdings.

Air Transat took delivery on 3 May of the first of 15 A321LR aircraft, on lease from AerCap Holdings.

The second delivery is scheduled for June, with four additional aircraft to be delivered in Autumn 2019.

… Transat changes business model

Lately, the company has focused on building out a new division that will construct hotels in beach destinations, such as in Mexico and the Dominican Republic.

Transat has been enticed by the prospect of earning 30% margins on all-inclusive hotels, and the company’s goal has been to have about 5,000 hotel rooms by 2024.

Transat has embarked on a financial turnaround and loan programme to build a network of hotels on sun destination beaches to better position the company in the face of increased competition from Canadian rivals, such as Air Canada Rouge, WestJet Vacations and Sunwing Airlines.

Also tipped as potential Transat buyers were travel operators, such as Germany’s Tui Group, which already owns a 49% stake in Toronto-based Sunwing Travel Group.

Acquisition of Transat by Sunwing would remove a key competitor from the market.

A European owner could make sense given the importance of transatlantic flights to Transat.

In the last half of 2018, approximately 75% of Transat’s total revenue came from transatlantic flights.

Quebec entrepreneur Pierre Karl Péladeau was said to be weighing a bid, joining several other local buyers expressing interest in Transat.

Péladeau, chief executive officer (CEO) and controlling shareholder of Montreal-based communications company Quebecor, had confirmed hiring an investment banker to advise on a potential offer, suggesting that part of the motivation was to prevent the company from falling into the hands of non-Quebec interests.

Montreal real estate developer Vincent Chiara also publicly declared interest in Transat.

Chiara, owner of Montreal property development company Groupe Mach, indicated that he had submitted an offer for the travel company.

Another potential local buyer was WestJet, Canada’s second-largest airline.

Calgary-based WestJet would gain an immediate foothold into the transatlantic market and a greater presence in Quebec.

The Quebec government has expressed willingness to provide financing for a Transat deal to a local buyer with a credible business plan.

Air Canada, however, has indicated there is sufficient funding available to complete the Transat transaction.

… Onex Corporation to acquire WestJet

Toronto-based private equity giant and asset manager Onex Corporation announced in mid-May signing of a definitive agreement to acquire WestJet in a deal worth about CAD5 billion ($3.7 billion), including debt.

CIBC Capital Markets is advising WestJet on the all-cash deal, while Bank of America Merrill Lynch provided financial advisory services to WestJet.

The transaction is expected to close in late 2019 or early 2020.

Onex previously made an unsuccessful effort to acquire Air Canada.

The Quebec government, however, would frown on a takeover by WestJet as the Alberta-based company would likely gut Transat’s Montreal head office.

Before the Onex offer — Onex has over $23 billion in assets owned or under management — there were concerns that WestJet lacked the financial heft to swallow Transat.

The Air Canada offer presents the government with another kind of problem.

While Canada’s flag carrier is headquartered in Montreal, Toronto’s Pearson Airport is the carrier’s most important hub.

And Transat’s Montreal head office would most likely be eliminated in the event of an Air Canada takeover.