Air Canada (TSX:AC) Stock Bailed Out: Time to Buy?

What does the Air Canada (TSX:AC) bailout mean for shareholders. Is it time to buy the stock?

| More on:
An airplane on a runway

Image source: Getty Images.

Finally, after months of negotiation with the federal government, Air Canada (TSX:AC) has reached a deal that allows it to access up to $5.879 billion in liquidity. The deal is a mix of loans, equity, and warrants.

Entering the pandemic, Air Canada had a decent balance sheet. It wasn’t the airline’s fault that the novel coronavirus pandemic clipped its wings, virtually halting flights around the world, resulting in the company raising $6.8 billion in liquidity during the pandemic. Air Canada’s debt-to-equity ratio ballooned nearly 3.3 times to 757% from a year ago.

The nearly $5.9 billion rescue package serves as additional liquidity to help smooth out Air Canada’s recovery.

The bailout is not just about Air Canada

What’s important to note is that the bailout is not just about Air Canada. It’s one of the government’s many ways to help the economy. In this case, in particular, it’s helping restore the airline industry that’s a critical part of the economy.

The Canadian government’s rescue package requires Air Canada to refund passengers whose flights were cancelled due to COVID-19, cap executive compensation at $1 million, and restore service to regional airports.

The refunds put money back into people’s pockets. They’re likely to spend this money somewhere since flights are restricted.

Capping executive compensation could reduce costs for the airline. This is much needed in these highly uncertain times for the company.

Restoring operations at regional airports means job creation. People who have jobs will spend more money, thereby helping fuel the economy.

What the financial package means to current shareholders

The Canadian government is providing a low-interest credit facility of $5.4 billion to Air Canada. The company can draw funds from it for up to seven years. About $1.4 billion will go to thousands of customers who have cancelled flights.

The government is also buying $500 million worth of Air Canada stock at $23.1793 per share, which was a 14% discount from the Monday’s market close price of $27. Not surprisingly, Tuesday witnessed the stock trading lower. This stake is roughly a 6% dilution to existing AC stock shareholders.

Additionally, the deal provides the government with 14.6 million warrants at $27.2698 over 10 years, with 50% vesting immediately. The warrants along with the previous equity stake could dilute shareholders by up to 10%.

Investors can see the government stake as positive or negative. The positive is that the government owns a piece of the company, which means it supports it and is confident that it will recover.

The negative? At one point, the government will sell its Air Canada stake (probably after it has recovered to more normal levels), at which time the stock could fall meaningfully.

The Foolish takeaway

The airline is an essential part of the economy. In 2019, a “normal” year, it brought in +$19 billion of revenue. The revenue dropped off the cliff to under $6 billion in 2020.

The Canadian government’s bailout package is helping Air Canada through these stressful times for the company, improving the company’s liquidity. On a recovery to more normalized operations, Air Canada stock can trade at least in the $40 range for +49% upside.

So, if you already own the stock, you might as well continue holding it. If you’re still on the sidelines, you might as well wait to see if it will get close to $23 (which is right about where the government is buying shares) in the near term.

Still, at this point, there’s a lot of uncertainty. Therefore, size your high-risk AC stock position accordingly.

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 Kay Ng has no position in any of the stocks mentioned.

More on Investing

Arrowings ascending on a chalkboard
Tech Stocks

Why I Think Nuvei Stock Has Market-Beating Potential

Given its growth initiatives, expanding addressable market, and attractive valuation, I believe Nuvei has the potential to outperform the broader…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Need Passive Income? Turn $5,000 Into $23.85 Every Month

If you're looking for passive income that comes in like a paycheque, this dividend stock provides that to you along…

Read more »

A worker drinks out of a mug in an office.
Metals and Mining Stocks

5 Things to Know About Nutrien Stock in December 2022

Trading at heavily depressed multiples, Nutrien stock is a great opportunity, as it delivers solid financial results and an optimistic…

Read more »

A shopper makes purchases from an online store.
Tech Stocks

Shopify Stock Rose 15% in November: Is it a Buy Today?

Shopify (TSX:SHOP) stock rallied 15% this month but is still down 69% year to date, so should investors worry that…

Read more »

Man holding magnifying glass over a document
Investing

The 3 Most Oversold TSX Stocks to Watch Before 2023

Many oversold stocks are merely victims of market circumstances and potentially profitable bargains when they seem downtrodden.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

A TFSA Contribution Room of $88,000 and 1 Dividend Aristocrat Can Make You $172,330 Richer

A high-yield Dividend Aristocrat in the energy sector is a suitable holding for Canadians with $88,000 available contribution rooms in…

Read more »

Upwards momentum
Investing

Year-End Sales Tracker: 3 Growth Stocks Going for Value Prices

Growth stocks like Aritzia (TSX:ATZ) are on discount.

Read more »

Dollar symbol and Canadian flag on keyboard
Investing

2 Canadian Stocks I’ll Be Buying Hand Over Fist in 2023

Alimentation Couche-Tard (TSX:ATD) and another top growth stock could increase dividends in 2023.

Read more »