WHAT’S NEXT FOR TRANSAT?: Company considers options after Air Canada deal ends

Transat AT is considering its options after a deal that would have seen Canada’s largest airline acquire its smaller travel rival officially died on Friday with word that Air Canada had come to a mutual agreement with Transat to terminate their planned merger.

Both companies released statements announcing the termination of the $190- million deal initiated more than two years ago and amended due to the weight of the COVID-19 pandemic on the transportation sector.

The end of the deal comes after the Air Canada and the tour company that operates Air Transat were advised by the European Commission that it would not approve the transaction.

Air Canada said it offered an enhanced package of remedies beyond what has traditionally been accepted by the commission in previous airline mergers.

“Following recent discussions with the EC, it has become evident, however, that the EC will not approve the acquisition based on the currently offered remedy package,” the company said in a statement.

“After careful consideration, Air Canada has concluded that providing additional, onerous remedies, which may still not secure an EC approval, would significantly compromise Air Canada’s ability to compete internationally, negatively impacting customers, other stakeholders and future prospects as it recovers and rebuilds from the impact of the COVID-19 pandemic.”

The European review was the final hurdle in the regulatory process after the Canadian government approved the transaction on Feb. 12 while imposing conditions.

Air Canada will pay Transat a $12.5-million termination fee, while Transat won’t be required to pay Air Canada anything if it enters into another deal in the future.

Montreal-based Transat said it is disappointed by the failure to complete the transaction but is confident of the company’s future.

“This transaction was complicated by the pandemic, and, ultimately, Air Canada reached its limit in terms of concessions it was willing to provide the European Commission to satisfy their competition law concerns,” said Transat CEO Jean-Marc Eustache.

He said the deal would have resulted in benefits to shareholders, customers and other stakeholders.

No longer constrained by terms of the agreement, Eustache said the company he co-founded is free to take necessary steps to ensure its future, including obtaining at least $500 million in long-term financing.

The company will continue to preserve cash and has put in place a $250-million short-term subordinated credit facility, which matures on June 30.

Transat is in negotiations for long-term funding, including under the Large Employer Emergency Financing Facility, and through support from the Canadian government for businesses in the travel and tourism sector.

“Discussions on both topics are at an advanced stage and Transat’s management is confident that a satisfactory financing will be secured in the coming weeks,” it said.

Federal Transport Minister Omar Alghabra says he’s spoken with Transat and is examining next steps. “The most important thing for our government is to protect jobs in Quebec and across Canada, as well as preserving the long-term viability of Transat AT,” he tweeted, adding, “Our government will continue to support Canadian workers and a strong competitive air transport sector.”

The government has come under fire by the country’s travel sector for failing to provide direct financial relief to airlines during a time when their operations have shrunk dramatically and losses have mounted.

A spokesman for Quebec Economy Minister Pierre Fitzgibbon also offered the government’s support. “We will not leave Transat without support, we are continuing to monitor development very closely,” he wrote in an email.

Transat’s operations have been grounded since a suspension of flights following the Canadian government’s request in January to stop travel to Mexico and the Caribbean because of the pandemic.

Air Canada is resuming idled operations in May and Transat expects to do so in mid-June with a pick-up in volume to Europe.

Transat is not expecting the air travel market to return to 2019 levels until 2024, chief operating officer Annick Guerard recently said in a conference call.

Transat is now free to hold discussions with potential buyers, including Pierre Karl Peladeau, whose investment company, Gestion MTRHP Inc., previously made a proposal to acquire all of the issued and outstanding shares of Transat for $5 a share.

Like many tourism-related companies, Transat has been severely impacted by lockdowns during the pandemic.

“However, the arrival of vaccines brings us a light at the end of the tunnel, and Transat is well-positioned to bounce back,” Eustache said, adding that, as a smaller operator, Transat can be “nimble and quickly adapt to ever-shifting market conditions.”

In addition, pent-up demand for leisure travel should help as this part of the business is expected to recover sooner than business travel, he said. “In close to 40 years of existence, we have traversed numerous crises and each time, we emerged stronger than before, demonstrating our resilience as an organization. We look forward to a safe and healthy future, as we hopefully put this pandemic behind us.”

TIMELINE

April 30, 2019: Transat shares gain more than 40% after the tour and travel operator announces it is in preliminary talks to sell the company.

May 10, 2019: As airline industry observers speculate about Air Canada and other possible buyers for Transat, a number of Quebec-based players express interest in the company. Dominik Pigeon, head of financial services company FNC Capital, says he has a group of interested investors after Montreal real estate developer Group Mach says it has submitted an offer. Pierre Karl Peladeau, president and CEO of Quebecor, says he has requested a financial analysis of the company for a personal investment.

May 16, 2019: Transat announces it is in exclusive talks with Air Canada, which offered to buy the company $13 per share or roughly $488 million. The two companies enter a 30-day negotiation period. Air Canada’s stock climbs to a record high.

June 4, 2019: Quebec real estate developer Group Mach Inc. says it will make a takeover offer for Transat worth $14 per share or $527.6 million in cash. The real estate developer was hoping the Quebec government would contribute $120 million in financing.

June 14, 2019: Group Mach formally submits its $14-per-share offer for Transat.

June 25, 2019: One day before the Transat-Air Canada exclusivity talks are set to expire, Groupe Mach announces it has reached an agreement with the Quebec government to support its rival bid, having dropped a key financing condition.

June 27, 2019: Transat’s board of directors approves Air Canada’s $520-million takeover offer. Despite the agreement, it’s unclear whether Transat shareholders will follow suit: Letko, Brosseau and Associates and PenderFund Capital Management, which jointly own a 21.1% stake, had previously said they would not support a $13-per-share purchase price.

July 3, 2019: Group Mach withdraws its bid saying the tour operator chose to ignore its proposal even though it featured a higher price than Air Canada’s offer.

July 17, 2019: Unifor president Jerry Dias, head of Canada’s largest private-sector union, says in an open letter that Air Canada is employees’ best option among Transat’s suitors, citing stability.

Aug. 2, 2019: In a bid to block the Air Canada deal, Group Mach offers Transat shareholders $14 per share in an effort to scoop up a large enough stake in the company to vote the bid down.

Aug. 6, 2019: Transat fires back, warning shareholders against what it calls Group Mach’s “abusive” and “misleading” move to block the sale and says it has filed a complaint with Quebec’s securities tribunal.

Aug. 11, 2019: Air Canada increases its offer for Transat by $200 million, bringing the total to $720 million of $18 per share. The new offer comes with the backing of Transat’s largest shareholder, Letko Brosseau and Associates Inc.

Aug. 12, 2019: Quebec’s securities tribunal blocks Group Mach’s offer to buy up Transat shares.

Aug. 13, 2019: Peladeau says he plans to vote against the sweetened $18-per-share offer and hints at an alternate proposal.

Aug. 23, 2019: Transat shareholders approve Air Canada’s $720-million acquisition offer.

Aug. 26, 2019: The shareholder-approved deal will undergo a 250-day public interest assessment, then-transport minister Marc Garneau announces. Garneau added 100 days to the typical review period for the Transportation Ministry and Competition Commissioner due to the size and scope of the proposed merger.

March 14, 2020: Against a backdrop of steadily climbing cases of COVID-19 worldwide, the federal government advises travellers to avoid all non-essential travel outside of Canada. Airlines, including Air Canada and Air Transat, see a massive decline in the number of passengers.

March 18, 2020: Transat begins a gradual suspension of flights until April 30, while Air Canada suspends the majority of its international flights. Like other airlines in Canada and abroad, temporary route suspensions will continue through the end of the year and beyond due to the COVID-19 pandemic.

March 27, 2020: The Competition Bureau says in a report to the transportation ministry that the proposed deal likely will hinder competition and result in less choice for Canadian travellers. It identifies 83 overlapping routes, more than half of which are between Canada and Europe. Transat’s stock ended the day trading for $8.98 – half Air Canada’s purchase price.

March-April 2020: Air Canada and Transat temporarily lay off thousands of employees as flights slow to a near-halt.

May 25, 2020: European regulators launch an investigation into the acquisition after a preliminary review noted the deal could significantly reduce competition on 33 routes between Europe and Canada. Transat delays the deal’s completion date by a month. Its shares end the day at $7.

June 19, 2020: European Union regulators suspend their investigation pending the arrival of more data from the two companies. The investigation resumes in September.

Sept. 10, 2020: Transat reports dire quarterly results, with revenues down 99%. Executives admit the Air Canada deal is no longer certain. Its share price falls below $5, more than 70% below the deal price of $18.

Oct. 10, 2020: The two travel companies announce they have reached terms for a revised deal that will see Air Canada buy Transat for $5 a share or $190 million, a significant discount to the original agreement.

Dec. 15, 2020: Transat shareholders vote to accept the revised takeover offer, with 91% of votes in favour of the deal.

Dec. 22, 2020: Peladeau’s investment company Gestion MTRHP Inc. submits an unsolicited proposal to Transat.

Jan. 12, 2020: Transat issues a statement reconfirming its support for the Air Canada takeover, saying the Gestion proposal is not supported by binding, fully committed financing.

Feb. 11, 2021: Government of Canada approves Air Canada’s proposed purchase of Transat. The deal is set to expire Feb. 15 unless extended.

Feb. 15, 2021: The deal expires without an extension; both parties say they are continuing discussions while awaiting a decision from European regulators.

April 2, 2021: The takeover attempt dies after Air Canada and Transat AT terminate the deal after the European Commission advised the airlines it wouldn’t approve the transaction.