Air Canada stock hits new high on news of exclusive talks to buy Transat AT

MONTREAL -- Air Canada's interest in buying rival Transat AT Inc. for about $520 million got positive feedback from industry watchers and stock traders Thursday after the two companies announced they're in exclusive talks to finalize a deal.

Transat shares rose 13.4 per cent to close at $12, while Air Canada stock gained nearly four per cent to $40.39, which is above the previous all-time high set Wednesday at $39.16.

The two companies say Air Canada -- the country's largest airline -- would pay $13 per share for Transat, the Montreal-based owner of Air Transat and numerous vacation travel businesses.

That's more than double what Transat shares were worth prior to its announcement that it was in talks with more than one potential buyer, without identifying the contenders.

McGill University professor Karl Moore said a combination of the two companies 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 this is part of their growth strategy," Moore said in an interview.

"And I think Transat is going to be in better shape because of the potential of being bought by Air Canada."

A deal that keeps Transat's head office in Montreal would also be greeted favourably by politicians in Quebec, just as Alberta politicians said they want to see WestJet headquarters remain in Calgary if it's bought by Onex, Moore said.

Toronto-based Onex Corp. announced Monday that it has a friendly deal to buy WestJet Airlines Ltd. -- Canada's second-largest scheduled airline company -- for about $3.5 billion, subject to approvals.

Moore said Air Canada will face stiffer competition from WestJet as a private company with backing from Onex.

Gabor Forgacs, an associate professor who teaches tourism and hospitality management at Ryerson University, said he doesn't think consumers will see a reduction of choice or competition from an Air Canada-Transat combination.

"I think they can beef up the whole selection of vacation packages they offer," Forgacs said.

In addition, he said, there continues to be competition in the packaged vacation business from Sunwing Travel Group, a private Toronto-based company that's 49 per cent owned by Germany's TUI Group.

"So I think the consumer will have similar selection, maybe even better," Forgacs said. "I don't see the traveller suffering any consequence."

Analyst Walter Spracklin of RBC Dominion Securities wrote in a note to clients that there are a number of factors that would justify a premium price for Transat stock.

For one thing, Spracklin said, an industry consolidation "improves fundamentals in a highly competitive leisure travel market."

Additionally, Spracklin said that access to Transat's fleet -- and its in-place order for Airbus A321 passenger jets -- would help Air Canada strengthen its Rouge discount brand.

"From a price paid, the multiple is on the higher end, reflecting the take-out premium; however (that's) justified by the strategic merits above," Spracklin concluded.

He and other analysts noted that Transat would have to pay a $15 million break fee if it terminates the deal and Air Canada would pay it $40 million if the agreement is terminated because of regulatory or governmental obstacles.

Mona Nazir, a transport analyst with Laurentian Bank Securities, issued a note advising clients "we do not believe that TRZ will get a better offer than $13."

"We think this is a great deal for Transat shareholders given it represents 149 per cent premium over the 20-day weighted average trading price prior to the announcement of April 30, 2019" when Transat first revealed it had been in discussions with more than one party about a potential sale of the company.

Transat chief executive Jean-Marc Eustache, who is one of the company's founders, said Thursday that an Air Canada deal represents the best prospect for maintaining or growing the number of jobs Transat has in Quebec and elsewhere.

In Quebec City, Premier Francois Legault -- another Transat founder -- said "it's good news that it's Air Canada because their head office is in Montreal and what I said from the beginning is I wanted to ensure the head office stays in Quebec."

Transat offers vacation packages, hotel stays and air travel under the Transat and Air Transat brands, with a primary focus on the transatlantic market during the summer and sun destinations through the winter.