Game On: Transat Shares Soar On News Of Potential Sale
Bruce Parkinson, Open Jaw
Transat's Jean-Marc Eustache with Open Jaw's Nina Slawek.
Let the guessing games begin.
The news that Transat is in preliminary discussions with more than one potential suitor did not come as a surprise to many who follow the company. The 33-year-old vertically-integrated operator has struggled to earn profit in recent years.
On earnings calls with financial analysts over the past couple of years, Transat executives led by co-founder, Chairman and CEO Jean Marc Eustache have sounded increasingly frustrated by disappointing results, despite concerted -- and successful -- attempts to cut costs.
That frustration was expressed again yesterday at Transat’s annual general meeting in Montreal. “The initiatives we’ve taken in our strategic plan have not yet borne fruit,” Eustache said. “They are still weighing on our results instead of improving them.”
Over recent years, Eustache has become convinced that the company’s current composition as an airline, tour operator and owner of hundreds of travel agencies was never going to earn large profits. He pushed hard for Transat to diversify into the hotel business, where margins are higher. That is happening, with shovels going in the ground in June in Mexico for a Transat-owned resort set to open next year. But it’s not a quick fix.
With that backdrop, Transat’s press release yesterday morning stating that it had been approached by more than one potential buyer sparked a wide range of speculation. It also sent Transat’s languishing stock price soaring – it was up 46% by the end of the day, putting the company’s market capitalization at about $325 million – still low considering Transat has about $600 million in cash reserves.
The big question among industry wags and financial analysts is, of course, who’s sniffing at Transat, which employs close to 5,000 Canadians and as a born and bred Montreal-based company, has symbolic value for the people of Quebec. Oh, and Quebec Premier François Legault was a co-founder of the company more than 30 years ago.
“It was heartbreaking when I learned yesterday afternoon of this offer that would be made to buy Transat," said Legault. "Obviously, it is emotional for me. You won’t be surprised to learn that we’ll do everything we can to keep the head office in Quebec.”
Among the potential buyers cited by industry watchers are Air Canada and WestJet. Transat continues to face strong competition from the pair, which have both beefed up their sun destination product in the past couple of years. And those airlines, especially with WestJet adding 787 Dreamliners to its fleet, are also competing more aggressively with TS’s profitable summer transatlantic flights.
“Competition is more acute than ever in our two markets – Europe and the South,” Eustache told the AGM.
Under federal transportation regulations, Transat must remain majority Canadian-owned. But that hasn’t stopped speculation about European operator TUI as a potential buyer. It owns 49% of Sunwing Travel Group, another key competitor to Transat. But TUI itself issued a profit warning in March, and is also struggling with structural change in the industry.
In a research note to stockholders, CIBC World Markets analyst Kevin Chiang says there are compelling potential reasons for any of those three -- Air Canada, WestJet and Sunwing -- to buy Transat.
AC already flies into Transat’s markets and could easily integrate the business, Chiang wrote. And the TS fleet would come in handy right about now as it scrambles to replace grounded Boeing 737 MAX planes, although that should be a temporary problem. WestJet could jumpstart its global aspirations with an acquisition and acquire coveted gates at YYZ’s Terminal 3, while a TUI/Sunwing buy would mean “addition by subtraction,” removing a key competitor and bringing more rationality to the sun market.
There are also factors going against all of those potential buyers. AC and to a lesser extent WestJet would face Competition Bureau scrutiny. TUI would have limited control as a foreign owner.
Large international investment funds are another possibility, like China’s Fosun, U.S.-based KKR and Sweden’s EQT Partners, which have all expressed interest in buying troubled UK-based operator Thomas Cook. But again, they would have limited control.
The largest current shareholders of Transat are Montreal's investment manager Letko Brosseau, which holds about 18% of shares, while the Fonds de solidarité FTQ holds just under 12%. There are several other shareholders, including the Caisse de dépôt with under 6% Eustache with 1.14%) and Philippe Sureau, another co-founder, with 0.86%.