Air Canada Offers to Buy Transat Airline for $387 Million

(Bloomberg) -- Air Canada said it’s in exclusive talks to buy one of the country’s largest travel tour operators, Transat A.T., for about C$520 million ($387 million) amid a wave of consolidation in the Canadian airline industry.

The country’s largest airline said in a statement it was prepared to pay C$13 a share for the Montreal-based company, a 23% premium to Transat’s closing share price Wednesday. The offer is more than double Transat’s price on April 30 when it announced it was in talks with at least one potential buyer.

The move comes just three days after Air Canada’s rival WestJet Airlines Ltd. agreed to be acquired by Canadian private equity firm Onex Corp. for C$3.5 billion in cash. The offer from Toronto-based Onex was at a 67% premium to WestJet’s stock price.

"A combination with Transat represents a great opportunity for stakeholders of both companies," said Calin Rovinescu, Air Canada’s chief executive officer, in the statement. "The acquisition presents a unique opportunity to compete with the very best in the world when it comes to leisure travel. It will also allow us to further grow our hub at Montréal-Trudeau Airport."

Transat jumped 14% to C$12.11 at 1:41 p.m. in Toronto. Air Canada rose for a fifth day, adding 4.8% to a record high of C$40.69.

Hotel Question

The decision by Air Canada to pursue Transat was unexpected but "not overly surprising," said Walter Spracklin, an analyst with RBC Capital Markets in Toronto. He said the tie-up would allow for increased scale, create better discipline and improve fundamentals in the Canadian travel-tour sector. It would also allow Air Canada access to Transat’s fleet of Airbus A321 aircraft when airline capacity is in limbo due to the Boeing 737 MAX grounding.

Air Canada’s management has not come to a decision on the hotel operations at Transat, and Transat has agreed to limit any undertakings or expenses related to its hotel strategy during the exclusivity period, Spracklin said in a note to clients. The tie-up would likely require an anti-trust review by regulators, he added.

“Competition will be examined given the overlapping areas of operation. Notable however is that we believe the Quebec social issues are addressed given AC’s headquarters in Montreal," he said, using Air Canada’s stock ticker.

Breakup Fee

Transat said last month it planned to launch a strategic review, including a potential sale, after being approached by several interested buyers. It said Wednesday that during the 30-day exclusivity period it planned to continue its operations as normal.

Any finalized deal would be subject to a C$15 million breakup fee, and Transat would be able to withdraw from the exclusivity period if it received an unsolicited proposal at least C$1 a share higher than the Air Canada bid and wasn’t matched by the Montreal-based airline, it said. Air Canada is also subject to a $40 million reverse break fee if the deal if the agreement is terminated if regulatory or government approvals are not obtained.

Transat is unlikely to get a rival bid from WestJet. Ed Sims, WestJet chief executive officer, said in an interview Monday he wouldn’t be pursuing the travel tour operator as his own company seeks growth overseas and through its ultra-low cost carrier, Swoop.

"We don’t want the distraction. We have a lot on our plate at the moment. We’re delivering those initiatives very successfully, and we want to enhance the value for our guests and enhance the value for our shareholders," Sims said. "It’s simply not on our agenda."

Transat employs about 5,000 people and offers travel packages to 60 destinations in 25 countries in Europe and the Americas, according to its website. The company has annual revenue of almost C$3 billion.

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