ACE Delay Means More Bad News for Air Canada

Includes: ACDVF, ACEAF
by: FP Trading Desk

Air Canada (AIDIF.PK) was dealt another blow this week after its parent company, ACE Aviation Holdings Inc. (OTC:ACEAF), indefinitely delayed a shareholder vote on its dissolution. The ACE overhang is expected to continue to drag on Air Canada’s stock, which hit a new low on the Toronto Stock Exchange this week.

The holding company currently owns 75% of the airline and its unwinding was expected to give a boost to the stock by letting it trade more widely.

Chris Murray, CIBC World Markets analyst, said in a note to clients:

We believe this news will be negative for Air Canada shares, as this continues the trading liquidity issues. Also, a failure to have ACE wound up prior to the start of labor negotiations this summer will add additional complications to an expected difficult set of discussions.

Air Canada’s unions, whose current contracts all expire by the end of June, have made their frustrations known over how ACE, under the stewardship of Robert Milton, returned more than C$2-billion to its shareholders by spinning off the airline’s various subsidiaries.

With Air Canada currently facing mounting debt and pension obligations, the so-called “Milton money” has become a sticking point for the unions, which gave up more than C$1-billion in wages and benefits during the previous round of negotiations while the airline was in bankruptcy protection. In fact, 5,000 customer service and sales agents cited this as a primary reason for rejecting an early labour deal with the airline in January.

ACE announced its dissolution plans in December, saying it would buy back its convertible preferred shares and notes before dissolving its remaining assets and distributing them to its shareholders. The plan, which is still subject to court approval and a shareholder vote, however, came up against stiff opposition from two of its major shareholders, West Face Capital Inc. and Marathon Asset Management.

After failing to have all of its preferred shares and notes tendered in a first bid in January, the company announced a second bid last month that closes on March 19. GLG Market Neutral Fund has agreed to tender its million preferred shares at C$20 per share in that bid, leaving roughly 3.2 million outstanding.

ACE had originally planned a shareholder vote on the plan on Feb. 27, but delayed it to April 7 last month to allow for further consultation with its dissenting shareholders. Those discussions continue and ACE said late Monday those talks and the current market conditions would delay a vote on the plan indefinitely.

“They are basically saying, ‘We don’t know what to do,’” said Jacques Kavafian, Research Capital analyst.

The airline’s stock dipped below C$1 for the first time Friday since its C$21 initial public offering in November 2006.