The Canadian Press
Published Thursday, May 16, 2019 8:38 AM
Last Updated Thursday, May 16, 2019 12:26 PM EDT
MONTREAL – Air Canada's interest in buying rival Transat AT Inc. for about $ 520 million got positive feedback from industry watchers and stockbrokers after the two companies announced on Thursday they are in exclusive talks to finalize an agreement.
The two companies say Air Canada – the country's largest airline – would pay a premium price of $ 13 per share for Transat, Air Transat's owner in Montreal and several holiday travel companies.
After two hours of trading on Thursday, Transat shares rose about 15 percent to $ 12.14 as Air Canada shares rose nearly 3 percent to $ 40, up from the fourth-highest US $ 39.16.
Karl Moore, a professor at McGill University, said a combination of the two would help grow Air Canada Vacations, which competes with Transat, WestJet and others in the leisure travel market.
"Air Canada's plan is to grow and that's part of its growth strategy," Moore said in an interview.
"And I think Transat will be in better shape because of the potential to be purchased by Air Canada."
An agreement that holds Transat's headquarters in Montreal will also be welcomed by politicians in Quebec as well as politicians from Alberta said they want WestJet's headquarters to remain in Calgary if it is bought by Onex, Moore said.
Toronto-based Onex Corp. said Monday it has an amicable deal to buy WestJet Airlines Ltd. – Canada's second-largest airline – for about $ 3.5 billion, subject to approvals.
Moore said that the level of competition that Air Canada faces from WestJet will increase with Onex's financial resources.
"Who knows for sure, but my feeling is that I would be surprised if (that) agreement does not get approved and go forward," Moore said.
Analyst Walter Spracklin of RBC Dominion Securities wrote in a note to clients that there are several factors that would justify a premium price for Transat's stock.
On the one hand, Spracklin said, an industry consolidation "improves the fundamentals of a highly competitive leisure travel market."
On the other hand, the addition of Transat will give Air Canada Vacations a broader reach.
In addition, Spracklin said access to the Transat fleet – and its on-site order for Airbus A321 passenger jets – would help Air Canada strengthen its Rouge discount brand.
"From a price paid, the multiple is at the upper limit, reflecting the withdrawal premium, but justified by the above strategic merits," Spracklin concluded.
Air Canada chief executive Calin Rovinescu said a combination with Transat represents a great opportunity for both companies.
"The acquisition represents a unique opportunity to compete with the best in the world when it comes to leisure travel," Rovinescu said in a statement.
Transat chief executive Jean-Marc Eustache said on Thursday that an Air Canada deal represents the best prospect for maintaining or increasing the number of jobs Transat has been developing in Quebec and elsewhere.
Transat offers holiday packages, hotel stays and air travel under the Transat and Air Transat brands, with a major focus on the transatlantic market during summer and winter destinations.
Transat announced for the first time that it had held preliminary talks on the possible sale of the company last month but did not name possible bidders at the time.
by David Paddon in Toronto