Transat shares lost almost 8% Tuesday after the carrier threw doubt that Air Canada will be buying all of its shares

Oh to be a fly on the wall of the negotiations between Transat and Air Canada. It’s been 18 months and one pandemic since Air Canada announced it would be buying all of Transat’s shares. Officially, the deal is still on. But perhaps it has never looked less certain than it did Tuesday.

Though Monday was a holiday in much of Canada, it was the date by which Transat and Air Canada hoped to conclude their deal. They call it the “outside date.” Monday came and went as European regulators continued their assessement of the merger. Competition authorities on both sides of the Atlantic worry about how much Air Canada will dominate the trans-Atlantic market if it is allowed to take on Transat. Despite the concern, Transport Minister Omar Alghabra gave his blessing Thursday. He offered Transat’s financial position as one of the justifications.

That wasn’t enough, however, to seal the deal.

“Because the Outside Date has now been reached and the approval of the Commission is still outstanding, and because Air Canada has indicated that it will not agree to an extension of the Outside Date, either party has the ability of terminating the agreement upon simple notice,” Transat said in a news release.

Translation: the deadline has come and gone and now either side can walk away. Transat expects a decision by the European Commission by June, though the deadline has already been extended severa times.

In effect for now

“There are no assurances that the Arrangement will be completed on the terms and conditions described in the current Arrangement Agreement or at all,” Transat said in its release. Both sides negotiated strict penalties if either wanted to walk away. Those penalties have now expired. All it will take to end the merger now is a simple notification. “Until terminated or amended by the parties, the Arrangement Agreement remains in effect in accordance with all of its terms.”

Air Canada did not reply to a request for comment.

On Friday, outgoing chief executive Calin Rovinescu was careful in a conference call with analysts.

“The proposed acquisition is a complex and sensitive matter,” he said. “Our ability to expand on the current level of disclosure is framed by various confidentiality, governance, contractual and other considerations. As such, we will not be providing any additional information at this point in time.”

Part of the challenge is that COVID has altered the landscape for air carriers.

“The market conditions of the global industry have been completely transformed,” said Transat. “Among other things, the vast majority of North American, European and international air carriers have requested financial assistance measures, but have had to implement reductions in capacity.”

All of Canada’s carriers have slashed routes and tens of thousands of jobs to adapt to the pandemic reality. Before the pandemic, Transat was Canada’s third-largest carrier, specializing in taking vacationing Canadians to overseas destinations. As a result of border restrictions, Transat shut down operations last month for the second time in less than a year. The number of passengers over the weekend was down 91% from the same long weekend in 2020.

Hanging in the balance

No airline-specific government aid has been announced, though the Globe and Mail reported Monday a package was close.

Transat executives warn their company’s future hangs in the balance if the deal fails.

“There is a risk that Transat’s lenders, lessors, credit card processors, clients and other trade partners become more preoccupied by Transat’s financial position, prospects and ability to execute its strategic plan as a going concern, which could result in more onerous credit terms, repayment obligations, an inability to refinance maturing indebtedness or find new sources of financing, restricted access to goods and services, and/or reduced business, all of which could significantly and adversely affect Transat’s cash flows and ability to continue as a going concern,” the company said.

Translated, that means people to whom Transat owes money may start to doubt the company’s future. As a result, they may demand higher interest payments. Or they may refuse to deal with Transat altogether. Executives estimated in December they would need as much as $500 million in loans and financing to survive the year.

“No company is built to operate at close to zero revenue for nine months,” Transat President and Chief Executive Officer Jean-Marc Eustache said at the time. “The mere fact that we are still standing is a tribute to how solid the balance sheets before the pandemic hit.”

It all adds up to a precarious position for Transat.

A white knight?

Quebec businessman Pierre-Karl Péladeau has offered to buy Transat. But Transat executives rejected his bid on January 12. On Saturday, Péladeau reiterated his interest in negotiating his interest in the leisure carrier.

With the deadline passed, “board members will be free to ensure the company’s sustainability,” he said in a Facebook post. Péladeau predicted Air Canada would continue to prolong talks, while watching Transat get weaker and weaker. “I invite [board members] to agree to reasonable terms with my group so we can, together, save Transat.”

Transat’s future has caused much political wrangling in Montreal, its hometown. While Air Canada is also based in the city, Transat enjoys firm backing in some of the more nationalistic communities. Quebec Premier François Legault helped found Transat in 1987.

Transat executives warned there are no guarantees. Especially not considering the current state of the aviation market.

“There can be no assurance that management will be successful in its efforts to identify and implement other strategic alternatives that would be in the best interests of the Corporation and its stakeholders,” the company said. Nor can they guarantee their plans will work. “Transat also has incurred significant transaction and related costs in connection with the transaction proposed under the Arrangement, and additional significant or unanticipated costs may be incurred.”

For now, both sides continue to talk, Transat said.

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