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Why Transat’s best bet is Air Canada’s offer to buy it for $520 million

Holiday travel company Transat AT Inc. decided the best way to keep its operations alive in a turbulent time is to sell its business to Air Canada, which has offered to buy its Montreal-based rival for $520 million.

Air Canada’s stock soared to a record high Thursday after the companies announced they had entered a 30-day period of exclusive talks to finalize a deal that would combine Transat with the country’s largest airline. If approved, the merger will reduce the number of competitors in Canada’s airline industry, particularly on summertime routes to Europe.

Air Canada pitched the deal as a “made-in-Quebec solution” to Transat’s troubles. But a sale wasn’t Transat’s first choice.

Transat tried to save its business with a turnaround strategy after reporting a net loss of $24.5 million in 2018 amid increased competition from Air Canada Rouge, WestJet Vacations and Sunwing. But it continued to lose money in the winter, and its plan to invest $750 million to build hotels in destinations such as Mexico was deemed risky by analysts who noted it would take years to materialize.

This spring, it started getting approached by potential suitors. As financial difficulties prevailed, its board decided to seriously consider offers. Quebec businessmen including Quebecor’s Pierre Karl Peladeau and FNC Capital’s Dominik Pigeon expressed interest in the travel company. Analysts speculated that Onex Corp., which announced this week plans to buy WestJet Airlines Ltd. for $5 billion, was also in line to buy Transat.

Teaming up with Air Canada “represents the best prospect for not only maintaining, but growing over the long term the business and jobs that Transat has been developing in Quebec and elsewhere for more than 30 years,” Transat chief executive Jean-Marc Eustache said in a statement Thursday.

While the merger requires regulatory approval, including from the Competition Bureau, investors and analysts alike praised the deal. Air Canada’s stock price rose 4 per cent to $40.40 and Transat’s shares jumped 13 per cent to $12.00, adding to the 46 per cent spike when Transat first announced it was evaluating offers at the end of April.

Quebec Premier François Legault, a co-founder of Transat, said the deal could be good for the province since both companies are based in Montreal.

“It’s a lot of emotion for me because of course I was there for the first flight of Air Transat with all the employees crying with joy,” Legault said.

“Of course, being bought by our competitor of the time is not easy to accept, but the good news is that Air Canada has a headquarters in Montreal, so I’m happy to see the headquarters will stay in Montreal if the transaction is closed between Air Canada and Air Transat.”

Transat realized it had to evolve

Any deal will be subject to the Canadian Transportation Act and the Competition Act, and potentially a public interest review, Transport Minister Marc Garneau said in a statement.

“Our government will continue to support greater choice, better service, lower costs, and new rights for Canadian travelers,” Garneau said.

The pairing did not come as a surprise, although the price was on the higher end reflecting the takeover premium, RBC Capital Markets analyst Walter Spracklin noted to clients.

The merger would give Air Canada increased scale in the highly competitive leisure travel market, particularly out of Montreal, Spracklin wrote. Given uncertainty around the duration of the Boeing 737 Max groundings, it could also give Air Canada access to more aircraft.

If approved, the combined company would have about 65 per cent of all the seats on all trans-Atlantic routes in the summer, according to an estimate from National Bank analyst Cameron Doerksen.

But AltaCorp Capital analyst Chris Murray doesn’t think they’ll face too much pushback from regulators given remaining competition from Sunwing and WestJet, which is in the middle of an international expansion, particularly to Europe.

Murray views the deal as positive for Transat given its business model was disrupted by both the internet – more people are booking online and forgoing travel operators – and increased competition. WestJet used to operate flights for Transat before deciding to launch its own tour service in the mid 2000s, he said.

AirTrav Inc. analyst Robert Kokonis agreed that Transat’s vertically-integrated business model came under threat when people started booking air travel separately from packaged tours. Air Canada Rouge, in particular, started to operate on the same routes.

“It isn’t as much what Transat did wrong, it’s just dynamics in the marketplace,” Kokonis said. “Transat realized it had to evolve, and Air Canada come along with the offer.”

— With files from Postmedia News

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