Air Canada in exclusive talks to buy Transat in $520-million deal

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Air Canada is in talks to buy Montreal-based airline and tour operator Transat A.T. Inc., offering $520-million in a deal that would combine the country’s flag carrier with the third-largest.

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

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

Air Canada, the country’s largest airline, said on Thursday its offer of $13 a share for Transat is a “made-in-Quebec” path to better job security for employees of both companies and a greater array of routes and holiday packages for travellers.

A combination of Canada’s No. 1 and No. 3 airlines would be subject to approval by shareholders of both companies, in addition to the Quebec government and the federal Competition Bureau.

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Between them, the airlines would command about 60 per cent of transatlantic tickets and 46 per cent of winter holiday seats to Mexico, the Caribbean and other sun spots. Analysts say the competition watchdog would look closely at the takeover and is likely to demand concessions from Air Canada that would reduce the market share of the combined airlines.

“We expect this to be a large hurdle,” said Corey Hammill, of Paradigm Capital.

But other bidders could still emerge for Transat, which in late April announced it is in discussions with “more than one party” about a possible takeover.

Dominik Pigeon of FNC Capital, a Montreal financial-services company specializing in management-led buyouts, told The Globe and Mail on Thursday that his group is undeterred by the exclusive negotiating rights Air Canada has obtained with Transat and that it is still weighing a bid. He said the carrier’s $13-a-share offer is toward “the bottom” of his estimated value of Transat. “I’m surprised the [Transat] board has accepted to provide flexibility to Air Canada at that price,” he said.

Robert Rennert of Toronto-based Elevate Aviation Consulting noted Transat is a big competitor for Air Canada’s lower-priced Rouge division on key international routes to Europe. Air Canada and WestJet are increasingly facing competition from European discount carriers, including Icelandair and Norwegian Air.

“Rouge was deployed as a competitive response to the ultralow-cost and the low-cost environment that we’ve seen in North America. Air Canada Rouge is being used increasingly to compete with the likes of WestJet, Sunwing and others,” he said, adding, “This is not an end to discounting. It just 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,” Mr. Rennert said by phone.

Domestic airfares in Canada have been trending lower in recent years as airlines have steadily added capacity and faced tougher competition. Average domestic base airfares 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 airfares were $325 versus $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 toward an all-Airbus fleet as it retires the 737s, recently entering lease agreements for 17 Airbus A321 Neos.

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

Walter Spracklin, a stock analyst at Royal Bank of Canada, said Air Canada is one of the few companies with the strategic interest to take over Transat. However, he said its pursuit is unexpected because he did not see any “gaping holes” in Air Canada’s services that Transat would fill.

He said the offer price is “on the higher end” but is justified by the benefits the acquisition will provide Air Canada. These include increased scale in the highly competitive leisure market, in addition to access to the desirable A321 plane.

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

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

With a report from Nicolas Van Praet in Montreal