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Virus Crisis Has Investors Doubt Air Canada’s Transat Deal

Virus Crisis Has Investors Doubting Air Canada’s Transat Deal

(Bloomberg) -- Tour operator Transat A.T. Inc. slumped to the lowest level since last May, opening up a large gap between the share price and a takeover offer from Air Canada.

Montreal-based Transat agreed in August to be acquired for C$18 a share in cash. The shares fell as low as C$9.77, about 46% below Air Canada’s bid, before paring part of the losses and trading at C$10.96 at 1:53 p.m. in Toronto.

The chasm suggests investors are questioning whether the C$720 million ($523 million) deal will happen in light of the coronavirus crisis, which has hammered the prospects for travel companies. Transat said Thursday that a decline in bookings that started Feb. 24 has accelerated to reach 50% in the past few days. The company said it was unable to provide an outlook for the second quarter or the summer travel season.

Asked by a shareholder about the stock price drop at the company’s annual meeting in Montreal Thursday, Transat Chief Executive Officer Jean-Marc Eustache said there’s no particular reason for the share collapse and pointed to the broad sell-off in airlines and tourism stocks. He said he expects the deal to go through as agreed.

The company is cutting expenses, started a voluntary four-day week and is seeking government support measures, including to help buoy wages. It’s also asking authorities to accelerated their review of the Air Canada deal.

The transaction “is taking a huge amount of time,” Chief Operating Officer Annick Guerard told journalists. “The more time goes by, the more airlines become vulnerable globally.

In theory, the virus outbreak and its impact on Air Transat could give Air Canada room to wiggle out of the deal, though it may be a hard point to argue, according to Dan Fong, an analyst at Veritas Investment Research. The agreement lets the buyer terminate the purchase under certain circumstances described as “material adverse effect.”

“The coronavirus’ impact on travel clearly has an adverse effect on Transat’s operations,” Fong said in an email. “However, the language in the agreement effectively says that material adverse effect must disproportionately affect Transat relative other companies operating in the same space.”

Air Canada didn’t respond to emails and calls seeking comments.

Virus Crisis Has Investors Doubt Air Canada’s Transat Deal

Transat says a clause in the deal protects it from a disease-related crisis and says there’s no grounds to revisit the transaction.

“To renegotiate with Air Canada? For what reason?” he told reporters. “We’re going to go forward and that is it.”

Goldman Sachs Group Inc. analyst Noah Poponak estimated global air traffic will drop 7% this year. Since his March 11 note, President Donald Trump’s 30-day ban on Europeans traveling to the U.S. delivered a hammer blow to airlines, already facing $113 billion in lost revenue worldwide this year because of the coronavirus.

Air Canada shares are down 49% since the beginning of the year. Transat has lost 30%.

Shareholders voted 95% in favor of the Air Canada bid on Aug. 23. The companies have been expecting the acquisition to close next quarter.

Re-opening discussions would be hard at this advanced stage, according to Chris Murray, an AltaCorp analyst. While there’s still uncertainty on what competition authorities will say, there’s no obvious reason that could derail the deal, he said.

“In the grand scheme of things it’s a viable transaction, I think, for Air Canada,” he said. “Can they afford to do this, is it possible to do this? Yes, I think it will be fine.”

--With assistance from Doug Alexander, Scott Deveau and Divya Balji.

To contact the reporter on this story: Sandrine Rastello in Montreal at srastello@bloomberg.net

To contact the editor responsible for this story: Derek Decloet at ddecloet@bloomberg.net

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