On Thursday, it was announced that Air Canada’s (TSX:AC)(TSX:AC.B) board of directors had voted to approve the company’s acquisition of smaller rival Air Transat (whose parent company is TRANSAT AT) for $520 million, or $13 per share.
There are still several regulatory hurdles that are yet to be approved, but here are three reasons why shareholders in Canada’s largest airline ought to be feeling very, very happy about the prospects of a potential merger acquisition between the two airlines.
Air Canada stands to get a very good deal on the proposed transaction
Air Canada’s tender offer was finalized at $13 per share, but what’s significant about that figure is that the proposed takeover price is actually less than the $14 per share offer that Air Transat is reported to have already been offered by a Group Mach, a Quebec-based real estate developer.
The fact that Air Transat essentially turned down a better offer from a rival bidder has naturally raised the ire of some of the company’s larger shareholders, who have said they would vote against the proposed deal with AC if the price remains at $13 per share.
Needless to say, the fact that Air Canada could get the deal done at a price arguably below fair market value could be a huge financial win for the board of directors, company management, and shareholders.
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A potential deal would be rife with synergistic opportunities
Beyond getting what could be a potentially very good price on the proposed transaction, a deal between the two airlines offers significant benefits for both parties.
Among those synergies would be the ability to reduce or even eliminate available redundancies between the two airlines, which together currently account for 60% of Canada’s transatlantic market and overlap routes on certain popular holiday destinations.
A merger, if approved by Air Transat’s owners, would still be subject to regulatory review to ensure that Canadian travellers won’t be at risk from a concentration of interests.
However, Air Transat has had to battle uphill in recent years, as it sought to compete with larger hub-and-spoke industry alliances and the company is on record that it hopes a deal with Air Canada would help it to deliver enhanced capabilities, more choices, and an overall better experience for travellers, while also helping to preserve the Transat brand and keep the firm’s head office where it is already in Montreal.
Immediately enhanced operational flexibility
Last but not least, this year’s earlier grounding of the Airbus 737 MAX fleet is costing Air Canada in cold, hard cash every day that those aircraft remain on the ground. It’s forced to lease less-efficient Airbus 320’s and Embraer E190’s in an already crowded market.
The pending acquisition of rival Transat would help alleviate some of that operational cash burn by giving it access to the smaller rival’s newer all-Airbus fleet and help it to offload operational headaches.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Jason Phillips has no position in any of the stocks mentioned.