MONTREAL — Transat AT shares rose 26 per cent Tuesday morning after Air Canada said it still plans to buy its smaller rival but at a substantially reduced price due to the collapse of the aviation industry amid COVID-19.
Transat stock climbed $1 to close at $4.83 in a return to mid-September levels, buoyed by Air Canada’s announcement Saturday of an amended deal.
The revised terms would see Air Canada pay $5 per share for the parent company of Air Transat, compared to the $18 per share originally pledged in its takeover bid.
The revision brings the total sale price down by 72 per cent to $190 million from $720 million previously, but provides assurance to investors that Canada’s biggest carrier still intends to go through with the purchase.
“Given Transat shares were already trading at a steep discount to the prior acquisition price, there was clearly a significant degree of skepticism in the original deal terms,” analyst Doug Taylor of Canaccord Genuity said in a research note.
The deal is endorsed by Transat’s board of directors but must be approved by two-thirds of Transat’s shareholders, who will vote in a special meeting in early December.
The company has not indicated whether the agreement has the support of its major stakeholders, which include Letko Brosseau, the Fonds de solidarite FTQ and Quebec pension fund manager the Caisse de depot et placement.
Regulatory approval from Canada’s federal cabinet and the European Commission’s antitrust body are also still pending, with the European Union expected to rule in early 2021.
The deal is expected to close in late January or early February, with a deadline set for Feb. 15.
Despite the airline sector’s travails, Air Canada sees payoffs in expanding its share of the Canadian market and eliminating a rival for European and sun destinations.
Before the coronavirus outbreak, the takeover would have handed Air Canada control of more than 60 per cent of transatlantic air travel from Canada.
“The pandemic has devastated the global airline and broader travel industry, but should the deal close, we see the potential for revenue and cost synergies over time,” said National Bank analyst Cameron Doerksen in a research note.
Nonetheless, previous suitors say they are no longer interested, citing an upended market and Air Canada’s inside track on the deal.
Vincent Chiara, president of Montreal-based real estate developer Groupe Mach, which submitted an offer for Transat in 2019, confirmed he has “no interest” in the company.
“The problem right now is the unknown surrounding the market and the financial situation, which has deteriorated a lot at Transat. It’s going to be difficult to make an offer without being able to do proper due diligence,” he said in an interview.
The agreement allows Air Canada to monitor Transat’s finances in a way that other potential bidders cannot, he noted.
“Air Canada has an advantage,” he said. “I do not believe that (Transat executives) will allow others to come and dig into the financial statements.”
Dominik Pigeon, head of Montreal-based financial services company FNC Capital who expressed interest in a bid last year, also said he has no plans for an offer.
“In the current situation with COVID-19 the market is no longer the same, and without the help of governments for Transat, the Air Canada solution is perhaps the only viable one today,” he said.
The revised deal saw Air Canada approve $250 million in increased borrowing by Transat pending the completion of the merger, a key leverage point for Air Canada in its push to slash the purchase price.
The agreement granted Air Canada veto power over certain loan actions by Transat.
This report by The Canadian Press was first published Oct. 13, 2020.
— with files from Julien Arsenault
Companies in this story: (TSX:AC, TSX:TRZ)
Christopher Reynolds, The Canadian Press