The bidding war for Canada’s airlines is escalating
See you, raise you. With the calculated meanness of high-stakes poker, the bidding war for Canada's two major airlines became noticeably more intense last week. Takeover specialist Gerald Schwartz sweetened his Onex Corp. bid for Air Canada with everything from more money to promises to serve more domestic wines. En route, he also appeared to be jettisoning his partner, giant American Airlines of Fort Worth, Tex., which would gain major service contracts from the merger but would now forgo an ownership position in any new Canadian airline. But Air Canada seems to regard Schwartzs play as little more than a bluff. The Montreal-based carrier responded with a bloodyminded court battle in Quebec and a blizzard of figures to argue its original counter-offer is still the best one.
Confused? Air Canada shareholders—mosdy sophisticated pension plan and mutual fund operators—who face a crucial vote on Nov. 8 may be in the same boat. On one side are some fund managers who say the Onex offer is a strong one that Air Canada will have a
tough time matching. Others feel Schwartz has thrown in the towel with a bid that is largely smoke and mirrors. And the end result for the travelling public, says Rod White, professor of business strategy at the University of Western Ontario, “may be a choice between less convenience, in the case of Onex, or higher fares, in the case of Air Canada. Each one has devised different strategies to make this thing pay off.” Adding to the confusion, Transport Minister David Collenette waded in to say Ottawa would “consider” lifting the 10-per-cent ownership restriction on Air Canada stock—but not necessarily to the 31-per-cent level that Onex is seeking. Before a parliamentary committee, Collenette all but conceded Canadians would soon have just one dominant airline. (Air Canada would run Canadian Airlines of Calgary as an independent domestic subsidiary.) The minister said the government would seek tougher new laws to boost compe-
tition and prevent price-gouging. But his promises were almost immediately overshadowed by Onex documents filed by Air Canada in Quebec Superior Court. The papers indicated the Onex group felt it had a direct pipeline to the Prime Ministers office, at least to convey its side of the deal, and perhaps even a commitment on new ownership levels from Collenette as far back as August. No more Mr. Nice Guy, Air Canada president Robert Milton said “it is highly inappropriate” for the minister to be talking about changing ownership rules in the midst of a takeover.
Because both the sweetened Onex bid and the Air Canada counter-offer are a mixture of cash and shares, they are difficult to compare. One way of looking at them: Air Canada is offering a total of $800 million to buy back 35 per cent of its stock; Onex is offering the same shareholders $1.1 billion, but because American Airlines is now pledged to tender its 14.9-per-cent portion of the deal, the net cash to shareholders would be $776 million.
Onex says it is offering $13 a share for Air Canada stock. But because there is a limit to what it will spend, this works out to $6 a share plus 54 per cent of the stock value in a merged company, whatever that might be worth, calculates York University economist Fred Lazar; the Air Canada offer can be computed at $4.25 a share plus 90 per cent of the new company’s share value.
Among the intangibles: Onex’s ability to wrest $600 million in proposed economies from a merged airline while adding debt and keeping its new pledge of no layoffs for two years and no changes to service levels, routes or regular seat sales for five years. Also on the line is the commitment of foreign backers—American Airlines in the case of Onex, Lufthansa and United Airlines in the case of Air Canada—who are fierce competitors. Air Canada’s Milton has hinted broadly that his backers have deep pockets. So it is probably safe to assume at least one more hand before shareholders get to the table next week.
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