The Motley Fool

Takeover 101: What’s Going on With Air Transat (TSX:TRZ)?

Image source: Getty Images

Air Transat (TSX:TRZ) is an integrated company in the tourism industry specializing in the organization, marketing, and distribution of holiday travel.

Its core business consists of a tour operator based in Canada, which is vertically integrated with its other services of air transportation, distribution through a dynamic travel agency network, value-added services at travel destinations, and accommodations.

The company reports a market capitalization of $604 million with a 52-week high of $17 and a 52-week low of $4.50.

Intrinsic price

Based on my calculations, using a discounted cash flow valuation model, I determined that Air Transat has an intrinsic value of $26.65 per share.

Assuming less-than-average industry growth, the intrinsic value would be $25.49 per share, and higher-than-average industry growth would result in an intrinsic value of $27.95 per share.

In a takeover bid, Air Canada has offered shareholders $18 per share, which represents a material premium to the pre-takeover share price. I believe Air Transat is substantially undervalued at the pre-takeover share price of $11.79. While I would like to see a higher offer from Air Canada, I believe Air Transat and Air Canada shareholders stand to benefit.

Air Transat has an enterprise value of $1.005 billion, which represents the theoretical price a buyer would pay for all Air Transat outstanding shares plus its debt. One of the good things about Air Transat is its low leverage, with debt at 0% of total capital versus equity at 100% of total capital.

Financial highlights

For the year ended October 31, 2019, the company reports a strong balance sheet with $314 million in retained earnings. This is a good sign for shareholders as it indicates the company has been reinvesting its surpluses in itself to grow the business.

Air Transat has a high cash balance of $565 million with $27 million in short-term lease obligations. The company has more than enough cash on hand to cover its short-term debt obligations, which is a good sign for investors as it reduces the company’s dependence on credit facilities.

Overall revenues are up slightly to $2.937 billion from $2.849 billion the prior year (+3%) driven by a $61 million increase in revenues from transatlantic flights. With an increase in operating expenses, the company reported a pre-tax net loss of $39 million, down from a pre-tax net income of $5 million in 2018.

The company’s cash flow statement is relatively unchanged year over year but it should be noted that capital expenditure spending is down from $119 million to $92 million. No explanation was provided but it can be concluded that capital expenditure spending will vary year to year based on factors such as demand and planned routes.

Foolish takeaway

Investors who own shares of Air Transat will be pleased to hear that Air Canada’s offer price is fair. Based on my discounted cash flow model, I determined that Air Transat has an intrinsic value of $26.65, compared to its pre-takeover share price of $11.79. Air Canada’s offer of $18 per share is a material premium.

Air Transat reports a solid balance sheet with positive retained earnings coupled with a cash balance in excess of $550 million. The fate of the deal now lies with regulators, which can still reject the deal on the basis of competition (given the lack of airline companies in Canada).

This Tiny TSX Stock Could Be the Next Shopify

One little-known Canadian IPO has doubled in value in a matter of months, and renowned Canadian stock picker Iain Butler sees a potential millionaire-maker in waiting...
Because he thinks this fast-growing company looks a lot like Shopify, a stock Iain officially recommended 3 years ago - before it skyrocketed by 1,211%!
Iain and his team just published a detailed report on this tiny TSX stock. Find out how you can access the NEXT Shopify today!

Click here to discover how!

Fool contributor Chen Liu has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.