MONTREAL — Back before COVID-19 changed just about everything, Air Canada was set to buy Transat for $720 million. Now under new terms just announced by both companies, the sale price is much lower: $190 million.
Given the severe negative impact the airline industry has seen since the start of 2020, it’s a miracle the deal is still on track at all.
“COVID-19 has had a devastating effect on the global airline industry, with a material impact on the value of airlines and aviation assets,” said Air Canada’s President and CEO, Calin Rovinescu on Oct. 10. “Nonetheless, Air Canada intends to complete its acquisition of Transat, at a reduced price and on modified terms.”
THE 2020 DIFFERENCE
Transat says its Board of Directors has unanimously determined that the amended $5 per share transaction, down from $18 per share, is in the best interests of Transat and its stakeholders, and is recommending that Transat shareholders vote in favour of the transaction.
What a difference 18 months can make.
As the travel industry knows only too well, there have been drastic changes since April 2019, when Transat first revealed it was fielding acquisition interest from a number of suitors, including Quebecor Inc. and Group Mach.
The sale price in the Air Canada and Transat deal was originally $520 million. In early June 2019, Group Mach made a rival bid for Transat. The Quebec-based real estate developer stepped up with a new bid worth $14 per share, topping Air Canada’s offer of $13 per share. Quebecor came back on the scene too. As all this played out, some major shareholders expressed dissatisfaction with Air Canada’s offer.
Then on Aug. 23, 2019, Air Canada’s bid, by then boosted to $720 million, got a resounding yes from an overwhelming majority of Transat’s shareholders.
BETTER DAYS AHEAD
Fast forward to 2020 and the devastation of the COVID-19 pandemic. Canada has all but shut down travel since mid-March, and much of the world is waiting to see the impact of the second wave.
But while the sale price in the Air Canada – Transat has dropped considerably, the fact that the acquisition is still on track is a testament to the strength of this industry and its players. Everyone knows there are brighter days ahead.
As Air Canada’s Rovinescu says: “This combination will provide stability for Transat’s operations and its stakeholders and will position Air Canada, and indeed the Canadian aviation industry, to emerge more strongly as we enter the post-COVID-19 world.”
The proposed deal has been on the radar for the Competition Bureau and other regulatory authorities, including those in Europe. If all the approvals are obtained and conditions are met, the transaction is expected to be completed in late January or early February 2021.
IATA estimates that full-year airline passenger traffic will be down 66% by the end of 2020 versus 2019. “It is clear that the world has changed since the signing of the original agreement in June 2019,” says Transat’s President and CEO Jean-Marc Eustache.
Eustache adds: “This is the worst crisis since the founding of Transat 33 years ago and with a second wave of the pandemic underway, the timing of an eventual recovery remains uncertain. More than ever, having a national airline with the scale to weather current industry turbulence, which is expected to continue for several years, is in the best interests of our shareholders, customers, employees and other stakeholders.”
Transat notes that given the uncertainty related to the COVID-19 pandemic, the company needed to put in place additional sources of financing. The terms of the original transaction restricted Transat’s ability to do so without Air Canada’s consent. As part of the negotiation leading to the Oct. 10 announcement, Transat has been able to implement a new $250 million short-term loan facility.
“Securing Air Canada’s consent to put in place the new loan facility was critical in the decision to revisit the terms of the original agreement with Air Canada,” said Jean-Yves Leblanc, Chair of the Special Committee of the Board of Directors of Transat.
Not only has the pandemic all but brought travel to a halt, it has also impeded the process of obtaining the required regulatory approvals. Transat says that with the passage of time, the concerns raised by regulatory agencies and the challenges posed by the post COVID-19 environment, Transat’s Board of Directors decided that the transaction proposed under the original arrangement agreement was unlikely to obtain the required regulatory approvals prior to the ultimate outside date of Dec. 27, 2020 and was therefore unlikely to be consummated.
“We believe that revised terms will provide the parties with greater incentives to address the concerns raised by regulatory agencies in order to obtain the regulatory approvals, including with respect to the offer of remedies which should provide a greater chance of obtaining the required approvals from regulatory authorities prior to the newly extended date of February 15, 2021,” said Mr. Leblanc.
He added: “Consummating the initial deal at $18.00 was not an option that was viable given the full set of circumstances the Corporation is facing.”
Under the terms of the revised agreement, Transat shareholders will have the option to receive payment of the consideration in the form of cash or shares of Air Canada, or a combination of both.
The transaction will be subject to shareholder approval, including approval by at least two thirds of the votes cast by shareholders present in person or by proxy at the special meeting that will be called to approve the transaction in early December.