Air Canada (TSX:AC): An Acquisition Could Happen Very Soon

The fortunes of the Air Canada stock could change if the acquisition of Transat pushes through soon. Potential revenue and cost synergies are in the offing, although air travel demand must return first to pre-coronavirus levels.

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Canada’s dominant air carrier aimed to become a global leader in leisure, tourism, and travel distribution. In May 2019, Air Canada (TSX:AC) made known its intention to acquire tour operator Transat AT, which operates rival airline Air Transat.

Aside from objections by industry regulators, COVID-19 almost messed up the deal. Airline companies, including Air Canada, went into a tailspin. The Canadian Competition Bureau warned that the proposed merger would hinder competition and result in higher prices.

However, border closures and plummeting travel demand were more pressing concerns than regulations. At one point, Air Canada was contemplating backing out after posting back-to-back billion-dollar quarterly losses. In October this year, it appears the transaction will push through, and the acquisition could happen very soon.

Grand vision                 

The plan was to merge the two companies but keep the Transat brands. By promoting two-way tourism, Canadian travellers will have more destination choices. Air Canada’s CEO Calin Rovinescu envisions enhanced capabilities in the highly competitive global leisure travel market.

Air Canada raised its purchase offer to $720 million in August 2019, with a breakup fee of $40 if it decides to terminate the takeover bid. Reports say that the company entered a lockup and support agreement with Letko Brosseau, Transat’s largest shareholder, which owns 19.3%.

Amended transaction

The latest news is that Air Canada is pursuing the deal. Transat shareholders agreed to a modified term that reduces the purchase price by 72%. Instead of $720 million, the offer is down to $190 million.

The deal was endorsed by Transat’s board of directors but must have the approval by two-thirds of the shareholders. The voting will take place in early December during a special meeting.

Likewise, the renegotiated transaction requires regulatory approval from Canada’s federal cabinet and the European Commission’s anti-trust body. Expect the ruling in Europe to come in early 2021. If everything is in order, the deal should conclude in late January or February 15, 2021, at the latest.

Under the terms of the new agreement, Air Canada can monitor all Transat’s finances and have veto power over loan activities. With the takeover before the COVID-19 outbreak, Air Canada was looking to control more than 60% of transatlantic air travel from the home country.

Consolidation looms

Potential for revenue and cost synergies are on the horizon, although the buyout news did little to prop up the airline stock. As of October 15, 2020, the share price is $15.52 or a year-to-date loss of 68%. Transat shares are doing worse with -70% thus far in 2020.

Peter Letko, a co-founder Letko Brosseau, said the purchase offer is reasonable. However, the firm will not commit to the deal yet because a rival bidder might emerge. Some analysts are saying a consolidation of airlines is much needed, given the travel downturn.

The deal might pass easier with Canadian and European Commission regulatory authorities. For Air Canada, the savings are worth around $530 million. The pricing reflects the pandemic’s impact on the airline industry and aviation assets.  Sadly, the meltdown is so severe that it will take years before capacity returns to pre-coronavirus levels.

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 Christopher Liew has no position in any of the stocks mentioned.

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