Air Canada reduces its Transat offer to just $5 per share, down from $18 per share approved by shareholders in August 2019

Transat said the deal will is the best chance to keep the operation viable as it faces its worst crisis in 33 years

Air Canada has drastically reduced the value of its offer for Air Transat, amid the ongoing effects of the COVID-19 pandemic.

Canada’s largest airline said Saturday it agreed to pay $5 per share for one of the country’s largest leisure carrier. That’s down significantly from $18 per share agreed to in August 2019. The value has dropped from $720 million to just $190 million, a drop of 72%.

“Consummating the initial deal at $18.00 was not an option that was viable given the full set of circumstances the Corporation is facing,” said Jean-Yves Leblanc, Chair of the Special Committee of the Board of Directors of Transat overseeing the sale process.

“COVID-19 has had a devastating effect on the global airline industry, with a material impact on the value of airlines and aviation assets,” said Air Canada chief executive Calin Rovinescu. “Nonetheless, Air Canada intends to complete its acquisition of Transat, at a reduced price and on modified terms.”

Transat shut down most operations in April due to the pandemic. It restarted limited operations in July. The pandemic threw the fate of the merger into doubt.

“With the volume now forecasted to be down 66% worldwide at the end of 2020, it is clear that the world has changed since the signing of the original agreement in June 2019,” said Jean-Marc Eustache, President and Chief Executive Officer of Transat. “This is the worst crisis since the founding of Transat 33 years ago.”

Financial lifeline

As part of the deal, Transat will take out a $250 million short-term loan, with Air Canada’s blessing.

“Given the uncertainty related to the COVID-19 pandemic and continuing restrictions on non-essential travel, together with the uncertainty surrounding the obtaining of required approvals from regulatory authorities, securing this new financing is a necessary, prudent decision and in line with similar actions taken by nearly all airlines around the world,” the company said.

The agreement contains new escape clauses. If Transat receives an offer of at least $6 per share, it can pay a penalty and back out. When the initial merger was proposed, Air Canada faced competing offers, forcing the airline to sweeten the pot.

The deal remains subject to shareholder and court approval. Two-thirds of shareholders will have to approve the sale at a special meeting in early December. The two sides have set a deadline of February 15 to conclude the sale.

Regulators in Canada and Europe are also reviewing the deal. They have expressed concern about the deal’s impact on trans-Atlantic competition. Based on calculations before the pandemic, a combined airline would control two-thirds of the market. Transat expects European regulators to decide the deal’s fate early next year. The Canadian government has not indicated when it will render a verdict.

Long-term impacts

It’s not clear what long-term impact the pandemic will have, but Air Canada expects to reintroduce additional services this winter. Transat, meanwhile, is planning a reduced schedule to sun destinations this winter, mainly using its fleet of Airbus A321 aircraft.

“With a second wave of the pandemic underway, the timing of an eventual recovery remains uncertain,” said Eustache. “More than ever, having a national airline with the scale to weather current industry turbulence, which is expected to continue for several years, is in the best interests of our shareholders, customers, employees and other stakeholders.”

Transat’s Leblanc said the revised agreement took into account “the significant and adverse impact of the pandemic on Air Canada’s original motivations for completing the transaction at the price set initially.”

Air Canada said the revised deal would allow both airlines to emerge from the pandemic.

“This combination will provide stability for Transat’s operations and its stakeholders,” said Rovinescu. “[It] will position Air Canada, and indeed the Canadian aviation industry, to emerge more strongly as we enter the post-COVID-19 world.”

Air Canada has promised to keep Transat’s operations separate.