Air Canada in exclusive negotiations to buy Transat in a $ 520 million deal

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An Air Transat jet lands at Montreal Airport in this photo from the 2016 file.

Graham Hughes / The Canadian Press

Air Canada is in talks to buy the Montreal Transat A.T. airline and tour operator. Inc., offering $ 520 million in an agreement that would combine the country's national airline with the third largest.

Transat said it had agreed to speak exclusively with Air Canada for 30 days, after receiving several approaches to buy the travel company, which has 5,000 employees and about 40 aircraft.

The news comes three days after private equity fund Toronto Onex Corp. surprised the Canadian airline industry by announcing that it will take control of WestJet Airlines Ltd. in Calgary in a friendly deal worth $ 3.5 billion .

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Air Canada, the largest airline in the country, said today that its $ 13 offer for Transat is a "made in Quebec" route to improve job security for employees of both companies and a wide range of routes and tourist packages for travelers.

A combination of Canadian airlines no. 1 and n. 3 would be subject to the approval of the shareholders of both companies, in addition to the Quebec government and the Federal Competition Office.

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Among them, the airlines would control about 60% of the transatlantic tickets and 46% of the seats for the winter holidays in Mexico, the Caribbean and other vantage points. Analysts argue that the competition watchdog would look closely at the acquisition and will probably require concessions from Air Canada that would reduce the combined airline market share.

"We expect this to be a major obstacle," said Corey Hammill, of Paradigm Capital.

But other bidders may still emerge for Transat, which at the end of April announced that it was under discussion with "more than one party" on a possible acquisition.

Dominik Pigeon of FNC Capital, a financial services firm from Montreal specializing in management-managed acquisitions, told The Globe and Mail that his group is not discouraged by the exclusive trading rights that Air Canada has obtained with Transat and is still evaluating an offer. He said the offer of $ 13 per share of the carrier is towards the "bottom" of its estimated value of Transat. "I am surprised that the board of directors [Transat] has agreed to offer flexibility to Air Canada at that price," he said.

Robert Rennert of Elevate Aviation Consulting, based in Toronto, found that Transat is a big competitor for Air Canada's low-cost Rouge division on major international routes to Europe. Air Canada and WestJet are facing increasing competition from European discount carriers, including Icelandair and Norwegian Air.

"Rouge was implemented as a competitive response to the ultra-low-cost and low-cost environment we saw in North America. Air Canada Rouge is increasingly being used to compete with players like WestJet, Sunwing and others," he said. , adding: "This is not an end to the discount. It gives Air Canada a little more breathing space in what has become an increasingly competitive North Atlantic market.

"This is a good strategic move for Air Canada," Rennert said by telephone.

Domestic air fares in Canada have fallen in recent years as airlines have steadily increased capacity and faced tougher competition. Average domestic air fares before taxes and fees fell to $ 167.50 in the third quarter of 2018 from $ 194.40 in the first quarter of 2013, and average international air fares were $ 325 against $ 304, according to Statistics Canada.

Transat sells vacation packages and air travel to 60 destinations in the Americas and Europe. Its fleet includes Airbus A330s and Boeing 737-700s and 800s. Transat is moving to a fleet of all-Airbuses as it discards the 737s, recently entering lease agreements for 17 Airbus A321 Neos.

Analysts say Transat's fleet offers new Air Canada seats and Airbus orders in place at a time when the 24 Air Canada Boeing 737 Max planes are rooted, along with the rest of the world, after two fatal crashes in Ethiopia and Indonesia .

Walter Spracklin, an equity analyst at the Royal Bank of Canada, said that Air Canada is one of the few companies with the strategic interest to take over Transat. However, he said his research is unexpected because he didn't see "holes" in the Air Canada services that Transat would fill.

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He said the price of the offer is "in the high end" but is justified by the benefits that the acquisition will provide to Air Canada. These include a greater scale in the highly competitive leisure market, in addition to access to the desirable A321.

Air Canada and WestJet refused to comment or give interviews on Thursday. Jean-Marc Eustache, CEO of Transat, was not available for an interview, a company spokesman said.

Last year, Transat purchased land in Puerto Morelos, Mexico, to build its first hotel complex, but agreed to stop spending on the project while acquisition talks are active. Analysts said this is a sign that Air Canada has little interest in becoming a hotelier and intends to focus on Transat's core business.

With a report by Nicolas Van Praet in Montreal

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