14 MAY 2019: After missing out on Canadian Airlines and Air Canada, Gerald Schwartz finally has an airline. His private equity firm Onex Corp. is making its long-coveted leap into aviation by signing a friendly deal to buy WestJet Airlines Ltd. in an all-cash transaction of $3.5 billion. Under the agreement announced Monday, Onex will pay $31 per share for WestJet, which will operate as a privately held company after two decades on the Toronto Stock Exchange.
The price represents about a 67 percent premium to the shares, which closed Friday at $18.52 -roughly the same price it reached the year of its initial public offering. The stock closed up nearly 60 percent or $11.09 at $29.61 on Monday.
The two companies said the deal, worth about $5 billion including debt, will be subject to a shareholder vote, likely in July, and close in the second half of 2019 or early 2020.
Tawfiq Popatia, a managing director at Toronto-based Onex, expressed confidence in the airline’s trajectory, which has seen it evolve from a low-cost regional carrier to a full-service international airline targeting higher-yield business passengers.
“The plan is what draws us. The plan is very much part of the appeal of this business…We’re very much investing in this management team,” he told The Canadian Press, saying that no major changes were afoot.
Popatia added that Onex will continue the current employee profit-sharing program that sees a portion of profits distributed twice a year to all 14,000 WestJet employees, on top of an annual bonus.
WestJet chief executive Ed Sims, who will remain CEO, said “there are no job losses planned as a direct consequence of this transaction.”
Industry consultant David Tyerman said “$5 billion is a lot of exposure” for the Toronto-based Onex, which has some US$31 billion of assets under management.
“To me it looks like they’re trying to capitalize on a situation where a company is a bit down and out because of the impact of launching a lot of initiatives that have yet to pay off, as well as the fallout from the pilot situation last year,” he said.
In the past six years, Calgary-based WestJet has created both regional and budget airlines -WestJet Encore and Swoop -and set its sights on long-haul routes with an order for 10 Boeing 787 jetliners set for delivery before 2022, receiving the first one earlier this year.
Intense competition remains a concern. A freshly expanded Flair Airlines, soon-to-launch Canada Jetlines Ltd., and Air Canada’s low-cost Rouge are all crowding the budget airspace that WestJet has flown into with its 11-month-old, ultra-low-cost Swoop subsidiary.
Tyerman and other analysts were skeptical the new deal would benefit passengers through lower airfares at a carrier that has posted quarterly profits for 14 years straight, with the exception of one quarter last year.
Sims said he expects airfares will “remain exactly as competitive as they are today.”
Twenty years ago Onex teamed up with American Airlines parent company AMR Corp. in a hostile $1.8-billion bid plus the assumption of debt to acquire and merge Canadian Airlines (then the country’s second-biggest carrier) and Air Canada. The plan was dropped after being ruled illegal by a Quebec court.
Onex also failed in its effort in 2007 as part of a consortium to buy Australia’s Qantas Airways Ltd.
Analyst Benoit Poirier of Desjardins Securities said Onex might also look to acquire Transat A.T. The tour operator, which owns Air Transat, competes with WestJet for sun destinations and launched in 2017 a $750-million plan to develop a hotel chain in Mexico and the Caribbean.
“We believe it would be easier for WestJet to acquire Transat once the company is integrated within Onex, as unlocking Transat’s full potential could take a few years (three to five years) -which might be less suited for a public entity,” Poirier said in an investor note.
The Quebec-based travel company has been in buyout discussions with several suitors since last August, including Quebecor CEO Pierre Karl Peladeau, Montreal developer Groupe Mach and financial services company FNC Capital.
“We don’t speculate on any issues along those lines,” Sims said Monday.
WestJet’s current growth spurt could also generate profits to offset the rising cost of labour following the unionization of fight attendants and pilots.
Private sector union Unifor said it would stand up for WestJet workers as it is sold to Onex, “a takeover specialist with a long history of cost cutting and restructuring at the companies it buys.”
The man behind Onex and the WestJet deal
The man behind the transaction for Onex, is 77-year-old founder and chief executive officer, Gerald Schwartz, who together with his wife Heather Reisman, founder and CEO of Indigo Books and Music, are one of Canada’s richest families.
Onex is considered a global force in private equity, and for philanthropy, having donated millions to universities and hospitals.
Schwartz has been inducted into the Canadian Business Hall of Fame and is an officer of the Order of Canada.