Air Canada reaches deal for Transat, but shareholder approval up in the air


The board of directors of Transat AT Inc. has approved a $520-million takeover offer by Air Canada, a deal that faces legal and regulatory scrutiny along with resistance from major Transat shareholders.

The companies announced Thursday that Air Canada will pay $13 per share for the travel company.

Under the agreement, Air Canada said it plans to preserve the Transat and Air Transat brands and keep the tour operator’s head office and key functions in Montreal.

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In approving the Air Canada offer, the Transat board turned down a rival bid by Group Mach Inc., a Quebec real estate developer that offered $14 per share or $527.6 million for Transat.

The deal with Air Canada may still face an obstacle in Transat’s biggest investors.

Letko, Brosseau and Associates and PenderFund Capital Management, which jointly own a 22.06 per cent stake, have said they would vote against the agreement if the purchase price remained at $13 per share.

The agreement requires approval from two-thirds of Transat shareholders to go through. Quebec’s Fonds de solidarite FTQ, Franklin Templeton Investments, and the Caisse – Quebec’s pension fund manager – are also among the top five investors, collectively holding a 26.18 per cent stake.

Air Canada and Transat command a combined 60 per cent slice of the transatlantic market from Canada, overlap on some sun destinations and maintain a firm hold on Montreal air travel, triggering a forthcoming review from Canada’s Competition Bureau.

Analyst Doug Taylor of Canaccord Genuity highlighted “substantial regulatory scrutiny” as a potential hurdle.

Observers say a successful bid is unlikely to yield fewer choices or higher ticket prices, with international carriers as well as Canadian competitors such as WestJet, Flair Airlines and Sunwing Airlines Inc. still in the mix. Air Canada Vacations competes in the leisure market with all three companies.

Both Air Canada and Transat sought to downplay the threat of market dominance.

“Travellers will benefit from the merged companies’ enhanced capabilities in the highly competitive, global leisure travel market and from access to new destinations, more connecting traffic and increased frequencies,” Air Canada chief executive Calin Rovinescu said in a release.

“For our clients, it will offer even more choices and possibilities,” said Transat chief executive Jean-Marc Eustache, who co-founded the company’s predecessor in the early 1980s.

In addition to absorbing a competitor, Air Canada’s pending acquisition of Transat’s newer, all-Airbus fleet will come as a relief to the country’s biggest airline. Air Canada’s two-dozen 737 Max 8 jets – grounded along with 737 Max aircraft across the globe after two recent crashes killed 346 people – comprise about 20 per cent of its narrow-body fleet, costing the company cash as it leases less efficient Airbus A320s and three Embraer E190s.

Analysts have also pointed to the uphill battle Transat fought against large airlines that are plugged in to carrier alliances and sprawling hub-and-spoke systems, which enable more flights, higher passenger volumes and more efficient use of aircraft.

“Becoming a part of Air Canada would seemingly solve these issues so we therefore see an Air Canada offer as the best option for Transat’s long-term viability,” said analyst Cameron Doerksen of National Bank of Canada in a note to investors this month.

Doerksen said in a note Thursday a deal is “still far from a certainty” and “that by no means is acquiring Transat a ‘must-do’ transaction for the company.”

Transat would have to pay a $15-million break fee if it accepts a superior proposal that isn’t matched by Air Canada.

“Bottom line, we are surprised by the terms of the definitive agreement, as we had anticipated a higher offer from Air Canada considering opposition from major shareholders,” analyst Benoit Poirier of Desjardins Securities said in an investor note.

Group Mach chief executive Vincent Chiara said Transat has not formally responded to his offer because the company was in month-long exclusive talks with Air Canada through Wednesday.

“I think they will have shareholders who are not very happy, and ultimately it will require their approval,” Chiara told The Canadian Press.

“They accepted an offer that is inferior to the price of the market, that is inferior to an offer that’s on the table…and that comes with a risk to competition,” he said.

A Transat spokesman denied that the offer is still on the table, saying a condition that Transat hold off on a definitive agreement with Air Canada was not met.

“If the condition isn’t realized, that means the proposition is no longer viable,” said Transat spokesman Christophe Hennebelle.

Air Canada must pay a reverse break fee of up to $40 million if the transaction is cancelled because regulatory or governmental approvals are not obtained, subject to certain conditions.

Letko, Brosseau declined to comment Thursday. PenderFund did not respond to a request for comment.

Transat’s share price dropped by 81 cents or nearly six per cent to $13.38 in mid-afternoon trading on the Toronto Stock Exchange. Air Canada shares went up by $1.22 or more than three per cent to $40.58.

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