10 October 2020, Montreal, CANADA
Transat A.T. Inc. announced today that it has revised its arrangement agreement with Air Canada to reflect current market and economic conditions and the devastating impact of the COVID-19 pandemic on the worldwide airline, travel and tourism industries. Under the terms of the binding agreement they have entered into, unanimously approved by the Board of Directors of Transat, Air Canada will acquire all issued and outstanding shares of Transat for $5.00 per share, payable at the holder’s option either in cash or shares of Air Canada, or a combination thereof, to form a global Montreal-based combined company. The purchase price represents a premium of 31.6% over the 20-day volume weighted average price (VWAP) of Transat shares on October 8, 2020. Transat also announced today the implementation of a new $250 million short-term loan facility.
Jean-Marc Eustache, President and Chief Executive Officer of Transat, said:“With the volume now forecasted to be down 66% worldwide at the end of 2020, it is clear that the world has changed since the signing of the original agreement in June 2019. This is the worst crisis since the founding of Transat 33 years ago and with a second wave of the pandemic underway, the timing of an eventual recovery remains uncertain. More than ever, having a national airline with the scale to weather current industry turbulence, which is expected to continue for several years, is in the best interests of our shareholders, customers, employees and other stakeholders.”
Given the uncertainty related to the COVID-19 pandemic, continuing restrictions on non-essential travel, and the impact to date of the pandemic-related interruption of operations on its cash position, Transat needed to put in place additional sources of financing. The terms of the original transaction restricted Transat’s ability to do so without Air Canada’s consent. As part of the negotiation leading to today’s announcement, Transat has been able to implement a new $250 million short-term loan facility, as well as certain critical amendments to its existing senior loan facility providing Transat with additional flexibility in the context of the current business and economic environment.
Mr. Leblanc continued:“Securing Air Canada’s consent to put in place the new loan facility was critical in the decision to revisit the terms of the original agreement with Air Canada” said Jean-Yves Leblanc, Chair of the Special Committee of the Board of Directors of Transat overseeing the process leading to today’s announcement. “Another key factor in Transat’s decision was the likelihood of obtaining the necessary regulatory approvals before the fast arriving deadline of December 27, 2020, taking into account the significant and adverse impact of the pandemic on Air Canada’s original motivations for completing the transaction at the price set initially. Consummating the initial deal at $18.00 was not an option that was viable given the full set of circumstances the Corporation is facing”,
The process of obtaining the required regulatory approvals for the transaction under the original arrangement agreement has been significantly and adversely affected by the pandemic and its impact on the industry as a whole. With the passage of time, the concerns raised by regulatory agencies and the challenges posed by the post COVID-19 environment, the Board of Directors of the Corporation came to the conclusion that the transaction proposed under the original arrangement agreement was unlikely to obtain the required regulatory approvals prior to the ultimate outside date of December 27, 2020and was therefore unlikely to be consummated.
Mr. Leblanc said:“We believe that revised terms will provide the parties with greater incentives to address the concerns raised by regulatory agencies in order to obtain the regulatory approvals, including with respect to the offer of remedies which should provide a greater chance of obtaining the required approvals from regulatory authorities prior to the newly extended date of February 15, 2021.”
Based on the foregoing, Transat’s Board of Directors determined that the revised transaction, with the implementation of the new financing, is the best prospect currently available for Transat’s continued viability and the preservation of shareholder value relative to the alternatives available to it in the context of the original arrangement agreement, and therefore represents the best option for all Transat stakeholders, including shareholders, employees, creditors, suppliers, customers and partners.
The Transat Board of Directors, having received and considered the recommendation of its Special Committee of independent directors, and having considered all relevant factors including the terms of the original arrangement agreement and the status of the transaction contemplated thereby, has unanimously determined that the revised transaction is in the best interests of Transat and its stakeholders, approved the revised Arrangement Agreement and recommended that Transat shareholders vote in favour thereof. In addition, each of the directors of Transat has entered into a voting support agreement pursuant to which each of them has committed to vote in favour of the transaction.
Each of National Bank Financial and BMO Capital Markets has provided the Transat Board of Directors with an opinion to the effect that, as of the date thereof, the consideration to be received by holders of Transat shares with respect to the revised transaction was fair, from a financial point of view, to such holders, in each case subject to the respective limitations, qualifications, assumptions and other matters set forth in such opinions.
Additional Details about the Revised Transaction
The revised Arrangement Agreement terminates and replaces the original arrangement agreement between Transat and Air Canada dated June 27, 2019, as subsequently amended on August 11, 2019 pursuant to which Air Canada had previously agreed to acquire all issued and outstanding shares of Transat for a cash consideration of $18.00 per share.
Under the terms of the revised agreement, Transat shareholders will have the option to receive payment of the consideration in the form of cash or shares of Air Canada, or a combination of both. Air Canada shares issuable under the share payment election will be issued on the basis of a price of $17.47 per Air Canada share, translating into an exchange ratio of 0.2862 Air Canada share per Transat share. The price set for the Air Canada shares under the exchange ratio approximates the 30-day volume weighted average price (VWAP) of the Air Canada shares on September 23, 2020, the time the new cash consideration was in negotiation. Opting to receive shares of Air Canada provides upside opportunity by offering Transat shareholders the ability to participate in the potential long-term value created by Air Canada, and in the airline industry generally, in a post-Covid recovery environment, as well as sharing in the expected synergies resulting from the combination of the two companies.
The transaction will be subject to shareholder approval, including approval by at least two thirds of the votes cast by shareholders present in person or by proxy at the special meeting that will be called to approve the transaction in early December.
The transaction also remains subject to regulatory approvals, particularly those of authorities in Canada and the European Union. To this end, the parties are collaborating to provide information and make submissions to the regulatory authorities with the objective of securing the requisite approvals before February 15, 2021, which has been set as the outside date for the closing of the transaction. Based on information currently available, the European Commission’s decision is now expected early 2021. The Government of Canada has not indicated when it would render its decision.
The terms of the revised Arrangement Agreement provide for a break fee of $10 million, payable by Transat in case of termination of the agreement in certain circumstances, including upon acceptance of a Superior Proposal that is not matched by Air Canada. Under the revised Arrangement Agreement, a Superior Proposal is defined, in part, as an unsolicited bona fide written acquisition proposal, that is made at a firm price per share equal to or exceeding $6.00 in cash, that has fully committed financing from a financial institution or similar organization (or is made by a person with adequate cash on hand), and that the Board of Directors of Transat determines in its good faith judgment, after receiving legal and financial advice, would result in a transaction that would be in the best interests of Transat and its stakeholders and be more favourable, from a financial point of view, to Transat shareholders. The terms and conditions for the making of a Superior Proposal and its complete definition are contained in the revised Arrangement Agreement. Furthermore, a break fee of $30 million would be payable by Transat if the agreement is terminated by Air Canada following a change in recommendation by the Board of Transat, which change would have been based on a governmental financial assistance program that is material to Transat becoming generally available to the Canadian airline industry or the segments of the travel, hotel and tourism industries in which the Corporation operates.
The revised Arrangement Agreement also provides for the payment by Air Canada of a reverse break fee of a maximum of $30 million in the event that the agreement is terminated because regulatory or governmental approvals are not obtained, subject to certain conditions.
Finally, the revised Arrangement Agreement contains a new closing condition that Transat’s level of net indebtedness on closing not exceed a certain specified threshold.
In addition to shareholder and regulatory approvals, the transaction remains subject to court approval and other closing conditions usual in this type of transaction, and compliance with the revised covenants contained in the revised Arrangement Agreement (including with respect to the new requirement on Transat’s level of net indebtedness on closing described above), all of which must be obtained or satisfied no later than February 15, 2021. If such approvals are obtained and conditions are met, the transaction is expected to be completed in late-January or early February 2021.
Further details regarding the terms of the transaction are set out in the revised Arrangement Agreement. The transaction will proceed by way of a court-approved plan of arrangement pursuant to the Canada Business Corporations Act. Additional information regarding the terms of the revised Arrangement Agreement and the background of the transaction will be provided in the information circular for the special meeting of Transat shareholders to be held in early December.
Transat has retained National Bank Financial as financial advisor and Fasken as legal advisor. BMO Capital Markets and Norton Rose Fulbright are acting respectively as financial and legal advisors to the Special Committee of Transat’s Board of Directors.
New Loan Facility
In connection with the revised Arrangement Agreement, Transat will immediately implement newly secured $250 million short-term loan facility with National Bank of Canada as lead arranger. Given the uncertainty related to the COVID-19 pandemic and continuing restrictions on non-essential travel, together with the uncertainty surrounding the obtaining of required approvals from regulatory authorities, securing this new financing is a necessary, prudent decision and in line with similar actions taken by nearly all airlines around the world.
The new loan facility can be drawn in tranches at any time before February 28, 2021, subject to meeting relevant conditions precedent and borrowing conditions. Conditions include certain requirements regarding freely available cash before and after drawing on the facility. The new loan facility will terminate on the earlier of March 31, 2021 and the closing of the arrangement with Air Canada.
As part of the implementation of the revised Arrangement Agreement and the new loan facility, Transat has also been able to implement certain amendments to its existing senior loan facility that will provide it with greater flexibility in the context of the current business and economic environment, including the temporary waiver of certain financial ratios. Revised terms also include the introduction of a minimum unrestricted cash level requirement and restrictions on the ability to incur additional debt.
Source: Transat A.T.; Photo: Airbus