Air Canada: A Possible Takeover Target

by: FP Trading Desk

ACE Aviation Holdings Inc.’s (OTC:ACEAF) wind-up proposal, lower fuel prices, a better-than-expected Canadian air travel market, and Canada’s open skies agreement with the European Union could put Air Canada (AIDIF.PK) in play, a new report suggests. Its severely depressed share price may also lure strategic or financial buyers.

While it appears that ACE’s asset distribution plan would see its 75% of Air Canada’s outstanding shares passed on to shareholders, a court appointed liquidator would dictate what exactly is done with all of its assets.

Given their willingness to make acquisitions, Lufthansa (OTCQX:DLAKY), Air France/KLM (AKH) or British Airways (OTC:BAIRY) could be strategic bidders, according to Scotia Capital analyst David Tyerman. Lufthansa and Air Canada already have a revenue sharing agreement.

Toronto-based Onex Corp. (OTCPK:ONEXF) bid for the airline in 1999 but its plan to merge it with Canadian Airlines failed. This time around, financial buyers might be attracted by Air Canada’s considerable asset-based borrowing power, which the analyst pegged a C$1.2-billion. Mr. Tyerman said this should allow the company to fund its near-term liquidity challenges, while recent transactions suggest Air Canada should be able to execute on borrowing opportunities.

Admitting that interested investors should have a high tolerance for risk, the analyst pegged the mid-term value of Air Canada shares at around C$12. The stock continues to trade below C$1.50.

Mr. Tyerman told clients:

We think this could interest strategic or financial buyers, given the company’s currently depressed share price. The ACE windup will place control in the market.

He also noted that the process may result in ACE entertaining bids for its 75% of Air Canada’s outstanding shares.

While the company faces higher pension obligations as a result of collapsing equity markets, a recession-related traffic slowdown and a negative impact from the weak Canadian dollar, Air Canada’s modern or upgraded fleet, lower labour cost structure, market-leading loyalty program, in-the-money foreign exchange hedges, and lower fuel costs that will reduce the company’s bill from $3.9-billion annually to $1.4-billion, provide plenty of reasons to like its outlook, Mr. Tyerman said.