Why we’re holding tight to our Transat shares and awaiting a higher takeover bid

Benj Gallander, Ben Stadelmann, and Philip MacKellar
Thursday, May 23, 2019

“Transat Shares Should Soon Fly Higher,” read the headline on our article last September. Indeed they have, moving from about the $8.00 range to $11.54 at Thursday’s close.

The catalyst has been a passel of suitors seeking to acquire this enterprise, with Air Canada leading the way with a bid valued at $13 a share. The two companies are now engaged in 30 days of exclusive talks. We both feel that a takeover will happen, and being shareholders, our primary question is: At what price?

One key to a deal with Air Canada is that Transat AT can leave the head office in Quebec, where Air Canada is based. That would help satiate the desires of the provincial government.

Without question, Ottawa’s lords of competition will be looking at this one closely, concerned that it might leave too much flight power in the hands of one operator, which would put upward pressure on prices, another knock to the pocketbooks of Canadian consumers.

Perhaps a takeover by another party based in Quebec may be more palatable to the powers that be. There appear to be a number who have both the interest and the wherewithal to do a deal.

Why is Transat so attractive? Unlike virtually every other airline, it has no debt. It also has about $620 million in cash in the corporate coffers. Given that the current price to do a deal is $525 million, the knight in shining armour could effectively buy the airline with its own cash, so to speak, bearing in mind that that money is there because of customers’ deposits.

Still, that stash could make a takeover a viable option or more groups, which could in turn increase the value of the winning bid.

While Transat lost about $50 million last quarter and the bottom-line dances between red and black ink, with losses posted in four of the past 10 years, the macro environment for this industry shines.

With the global population growing and becoming more affluent, there will be additional demand to fly. Also, because of our large immigrant population, many people will want to regularly return to their homelands, or have relatives and friends visit here, boosting the number of bums in the seats.

This was also part of our logic after 9/11, when airline stocks were hammered. At that juncture, we nabbed KLM at US$9.36 and took a fair bit of criticism for doing so, as aviation was toxic at the time. It was sold in 2005 at US$30.99, after the merger with Air France. Criticize away.

One way that Transat plans to improve the bottom line is by building hotels, a move that would allow the enterprise to vertically integrate — not only booking Air Transat flights, but taking passengers to corporate lodges, which, when done efficiently, is more profitable than just being an airline.

That project would be capital-intensive, however, and we are skeptical about it. Whoever pulls off a takeover might put the kibosh to this blueprint. And Transat has agreed to sideline the idea for the moment.

It is worth noting that break-up fees are in order on both sides of the deal. If Transat marries another company, it would have to pay $15 million. With a share count of 37 million and change, that means that another offer would have to be, at minimum, 40 cents more per share than Air Canada’s to make it worthwhile.

But if this country’s largest airline cannot get a deal done, it will pay Transat $40 million. That isn’t a bad consolation price for not closing a deal.

Our spidey sense tingles that Transat will be sold to Air Canada, and that some shedding of routes or assets will have to transpire to make regulators happy. And it would not come as a surprise to see the flagship carrier put a bit more money on the table to close the agreement.

If that does not work, another made-in-Quebec solution could come to the forefront, at or above the current bid. For those reasons, we will hold our shares tightly and watch this process play out. Of course, if we are wrong and no deal is made, the shares will almost assuredly plummet, and we’ll be left grounded.