(Bloomberg) — With its purchase by Air Canada in jeopardy, tour operator Transat AT Inc. said it’s exploring a government emergency loan that could come as early as this month.
Montreal-based Transat said Thursday that it’s looking for at least C$500 million ($398 million) in long-term financing to cover its needs in case the transaction, which is still under European Union review, falls through. One of the options is the government’s Large Employer Emergency Financing Facility, known as LEEFF, which has been used by only one airline as the industry negotiates for a bailout program including cheaper loans.
A LEEFF agreement has been in the cards for a long time, but “now we’re pushing faster,” Chief Executive Officer Jean-Marc Eustache said on a call with analysts. “And they are working with us faster, to be sure that we’re going have the cash necessary to continue the organization if the deal doesn’t go through.”
The company is also in talks with other parties, including Quebec’s investment arm, he said.
Air Canada agreed to buy Transat, one of Canada’s largest sellers of vacation packages, in June 2019 and later raised its bid to C$18 a share to win over recalcitrant shareholders and seal a friendly deal. After the coronavirus pandemic struck, they revised the deal down to C$5 a share in cash or 0.2862 Air Canada shares, valuing Transat at about C$200 million.
Transat shares rose 2.5% to C$5.68 at 12:27 p.m. on Thursday. Air Canada rose 4% to C$29.85. At the latter price, a Transat investor receiving Air Canada shares would get C$8.54 worth of stock.
The deal has been thrown into doubt by regulators, with the EU failing to approve it by a Feb. 15 deadline. Air Canada declined to extend the deadline — meaning that the transaction is still alive but either company has the legal right to walk away from it.
Although an EU response is expected in the first half of the year, “at one point, one party or the two parties could say ‘Listen we will never go through that, and we will do what we have to do,’” Eustache said. “Something can happen tomorrow so we want to be sure that we will be ready.”
The company reported a quarterly adjusted loss of C$2.89 per share on Thursday. Revenue fell 94% from a year ago.
Strings Attached
Transat suspended all regular flights on Jan. 29 after the Canadian government asked carriers to halt travel to Mexico and the Caribbean and toughened quarantine rules for returning passengers. The company said it expects to resume flights in mid-June.
In an effort to preserve cash, Transat had previously cut its schedule, returned some leased planes early and negotiated better payment terms with suppliers, while using a government wage subsidy to help pay staff. It had C$302.8 million in cash at the end of January, less than half of what it had a year earlier.
A LEEFF agreement could replace a C$250 million short-term credit facility that expires on June 30. Funding would come mostly in the form of an unsecured facility that carries a 5% interest rate in the first year and rises afterward, according to the government agency running the program. There are also strings attached, including the possibility that the government would take an equity stake.
At the same time, it would let Transat give passengers vouchers to make up for canceled flights, instead of having to reimburse them under a government bailout plan, Eustache said. The company would need the financing for two to three years, he said.
If parties agreed on a broader industry aid package, which has been in discussion since November, Transat would participate, he said.
Eustache bristled at comments, including by the Caisse de Depot et Placement du Quebec pension, that Transat needs to find a Plan B.
One possibility is a takeover by Pierre Karl Peladeau, the chief executive officer of Quebecor Inc., who previously made an offer for Transat through his investment company. In a news release, Transat said it had no evidence of committed financing, adding that it could undertake discussions with Peladeau’s firm only if the agreement with Air Canada was terminated.
“There is no need to worry about a plan B,” Eustache said. “A lot of work is being done in the background, and all of it will come into the foreground if and when the time is ripe.”
(Updates throughout, including comments from CEO on earnings call)
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