Coming as a shock to many, Friday saw Air Canada and Air Transat simultaneously announce the termination of a deal that would have seen Canada's largest carrier acquire the smaller leisure airline. Now that the deal is off the table, what comes next for Air Transat at a time where its existence is threatened by ongoing travel restrictions?

"Now that Transat is no longer constrained by the limitations under the Arrangement Agreement, it is free to focus on relaunching operations under its strategic plan, including by leveraging its many competitive advantages." - Air Transat statement

The collapse of the acquisition

Despite successfully gaining approval from Canadian authorities amid concerns raised by Canada's Competition Bureau, Air Canada cited conditions it faced from the European Commission as the reason for the deal's termination.

"...ultimately, Air Canada reached its limit in terms of concessions it was willing to provide the European Commission to satisfy their competition law concerns," -Jean-Marc Eustache, President and Chief Executive Officer of Transat via an official airline statement

Eustache goes on to say that, despite receiving approval from the Canadian authorities, it was now evident that the airlines "would not obtain the approval of the European Commission."

With the termination of the deal, Air Canada has agreed to pay a C$12.5 million (US$9.98 million) termination payment to Air Transat. More importantly, Air Canada has agreed to waive its entitlement to a C$10 million (US$7.98 million) termination fee "in the event of an acquisition of Transat by a third party in the twelve months following termination of the Arrangement Agreement." This key concession gives Air Transat more freedom to secure a buyer without facing a hefty financial charge.

Air Transat now

The collapse of this deal, whether it benefitted consumers long-term or not, puts Air Transat in a precarious situation. The airline has extremely limited domestic operations (which at the moment appear to be non-existent) and has thus relied on international travel as its main form of generating revenue.

However, international travel restrictions imposed by the Canadian government have severely limited travel activity, as those entering the country now face at least three nights in a government-authorized hotel upon their return. This is in addition to Canada's strict arrivals policy, which only allows the entry of Canadian citizens and permanent residents- something that has been in place for a year now. To make matters worse, the Canadian government has yet to announce a sector-specific relief package to assist the struggling airline industry.

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With international travel restricted and no government support yet forthcoming, Air Transat may not last long if these external conditions remain as-is. Indeed, Air Transat has stated previously (and has since reiterated) that it requires "new financing totaling at least of $500 million in 2021," adding that it has been "taking and will continue to take all measures available to it to preserve cash and [...] has put in place a $250 million short-term subordinated credit facility, which matures on June 30 and will need to be replaced or extended before that date."

C$500 million is equivalent to US$399 million.

Péladeau to the rescue?

Now, everyone who has been following the story of Air Canada's long and drawn-out acquisition attempt is turning their focus to businessman Mr. Pierre Karl Péladeau - the owner of the investment company Gestion MTRHP Inc. Péladeau had put forward his own offer and accused Air Transat of ignoring it. The airline said at the time that the proposal lacked the required level of financing.

Seemingly a response to Air Transat's statement, in mid-February, the following public statement was issued by the Quebec businessman:

“For anyone in doubt, I have means to support my ambition and I wish to take over Transat so that Quebecers can continue to benefit from the choice that competition provides.” -Pierre Karl Péladeau via CTV News

With the winds shifting significantly, Air Transat is indeed hoping Péladeau (or at least someone with similar financial resources) can swoop in to rescue the airline. In its statement, it said:

"Now that the Arrangement Agreement has been terminated, Transat is free to hold discussions with potential strategic and financial acquirers, including Mr. Pierre Karl Péladeau, whose investment company, Gestion MTRHP Inc., previously made (and since reiterated) a proposal to acquire all of the issued and outstanding shares of Transat for $5 a share. The Board intends to examine available strategic alternatives, including the pursuit of the Corporation's stand-alone business plan."

Péladeau and his investment firm would seem to be a good fit to take control of the airline. Although Air Transat has had operations at major airports across Canada, it is based in Montreal and has strong roots in Quebec. With Péladeau being a Quebec-native himself (born in Montreal no less), the businessman would likely be higher on the list if other 'outsiders' were to also show interest in acquiring the carrier.

Could Air Transat now sell for less?

While Air Canada had agreed to acquire Air Transat for C$5 per share, the termination of the deal puts Air Transat in a vulnerable position. With the hefty price tag and current situation, there are few companies or individuals that have the resources and means to save the carrier and pour money into a business that is unable to generate revenue in the short term.

It's in this position of weakness that we could see offers for less. If we consider competition as a force that drives up the bidding price, the lack of competition would logically bring it down. We'll have to wait and see if bidders other than Péladeau make themselves known. Additionally, it will be interesting to see if Mr. Péladeau's bidding price changes now that he knows the airline has fewer options.

What do you think will happen to Air Transat in the months going forward? Will the airline remain under its current form of ownership with the help of a government bailout? Or will a wealthy individual or investment group pick up the airline for a deal? Let us know your thoughts in the comments.