Onex’s WestJet Deal Could Reshape Canadian Airline Industry

Onex Corp.’s $5-billion acquisition could reshape Canada’s airline industry and bring in Air Transat in its fold at a later date, according to analysts.

Toronto-based private equity giant and asset manager Onex is taking Calgary’s WestJet Airlines Ltd. private in a deal worth $31 per share or $5 billion, including debt, that represents a massive 63 per cent premium over WestJet’s share price over the last 20 days. WestJet’s stock shot up 60 per cent on the news to $29.66 on the Toronto Stock Exchange.

The huge premium is a signal, analysts say, that Canadian airlines have been persistently undervalued relative to firms in other countries and is a particularly positive sign for rival Air Transat, the Montreal-based airline which is currently in sale talks.

The Onex/WestJet deal is also the most high-profile example of a trend playing out in the sector — of private equity companies buying stakes in Canadian airlines.

Onex approached WestJet with a proposal in March to buy the company through its private equity firm Onex Partners. The WestJet board, which includes founder and chair Clive Beddoe, voted unanimously in favor of the deal.

It’s possible but highly unlikely that another strategic buyer or private equity firm will emerge with a competing offer for WestJet, said analyst Scott Chan of Canaccord Genuity.

Onex has the “opportunity to de-lever” WestJet over the medium-term and could make a tidy return on the company in the way they purchased Spirit AeroSystems from the Boeing Co. in 2005 and sold off the company in 2014.

A significant number of steps are required between now and the close of any transaction, with a number of interested stakeholders expected to weigh in on the merits of the WestJet acquisition.

Large investment managers are already heavily invested in the Canadian aviation sector. Montreal-based Letko Brosseau & Associates is the largest shareholder in both Air Canada and Transat AT, and the second largest in WestJet according to Bloomberg data, while Fairfax is the largest shareholder in Chorus Aviation. Silchester International Investors LLP is the WestJet’s biggest investor with a 16.7 per cent stake.

Air Canada shares rose 5 per cent to $37.99 each in mid-day trading, while Air Transat owner Transat AT Inc. shares rose 4 per cent to $10.27 each. Even the smaller Chorus Aviation Inc., an aircraft leasing firm based out of Dartmouth, N.S. that operates Jazz Airlines, rose two per cent per share to $7.29 per share, defying a broader decline in global markets.

The Onex deal for WestJet is particularly positive for Air Transat as it increases the likelihood the Montreal-based company will be acquired — by WestJet, Desjardins Securities analyst Benoit Poirier said in a research note.

Onex might look to acquire Transat A.T. The tour operator, which owns Air Transat, competes with WestJet for sun destinations and launched in 2017 a $750-million plan to develop a hotel chain in Mexico and the Caribbean.

Transat AT announced April 30 that the company was in preliminary talks to sell the airline and travel company, which sent its shares soaring, and has since drawn interest from a range of private equity buyers, other airlines and well-known Quebec business people.

If a private equity firm takes out Air Transat, it would continue a trend that has been playing out among the smaller operators in the sector in recent months.

Miami-based investment firm 777 Partners acquired a 25 per cent interest in Edmonton-based low-cost carrier Flair Airlines in April for an undisclosed sum. Before that, Phoenix-based private equity firm Indigo Partners took an interest in low-cost start-up Enerjet in Dec. 2018.

Source: The Financial Post