Private equity firm Onex Corp. is making its long-coveted leap into aviation by signing a friendly deal to buy WestJet Airlines Ltd. in an all-cash transaction of $3.5 billion.
Under the agreement announced Monday, Onex will pay $31 per share for WestJet, which will operate as a privately held company after two decades on the Toronto Stock Exchange.
The price represents about a 67 per cent premium to the shares, which closed Friday at $18.52 — roughly the same price it reached the year of its initial public offering. The stock closed up nearly 60 per cent or $11.09 at $29.61 on Monday.
The two companies said the deal, worth about $5 billion including debt, will be subject to a shareholder vote, likely in July, and close in the second half of 2019 or early 2020.
Tawfiq Popatia, a managing director at Toronto-based Onex, expressed confidence in the airline’s trajectory, which has seen it evolve from a low-cost regional carrier to a full-service international airline targeting higher-yield business passengers.
“The plan is what draws us. The plan is very much part of the appeal of this business…We’re very much investing in this management team,” he told The Canadian Press, saying that no major changes were afoot.
Popatia added that Onex will continue the current employee profit-sharing program that sees a portion of profits distributed twice a year to all 14,000 WestJet employees, on top of an annual bonus.
WestJet chief executive Ed Sims, who will remain CEO, said “there are no job losses planned as a direct consequence of this transaction.”
Industry consultant David Tyerman said “$5 billion is a lot of exposure” for the Toronto-based Onex, which has some US$31 billion of assets under management.
“To me it looks like they’re trying to capitalize on a situation where a company is a bit down and out because of the impact of launching a lot of initiatives that have yet to pay off, as well as the fallout from the pilot situation last year,” he said.
In the past six years, Calgary-based WestJet has created both regional and budget airlines — WestJet Encore and Swoop — and set its sights on long-haul routes with an order for 10 Boeing 787 jetliners set for delivery before 2022, receiving the first one earlier this year.
Intense competition remains a concern. A freshly expanded Flair Airlines, soon-to-launch Canada Jetlines Ltd., and Air Canada’s low-cost Rouge are all crowding the budget airspace that WestJet has flown into with its 11-month-old, ultra-low-cost Swoop subsidiary.
Tyerman and other analysts were skeptical the new deal would benefit passengers through lower airfares at a carrier that has posted quarterly profits for 14 years straight, with the exception of one quarter last year.
Sims said he expects airfares will “remain exactly as competitive as they are today.”
Popatia pointed to Onex’s history in aviation, with past investments in aerostructures manufacturer Spirit AeroSystems and in-flight catering company Sky Chefs.
Twenty years ago the firm teamed up with American Airlines parent company AMR Corp. in a hostile $1.8-billion bid plus the assumption of debt to acquire and merge Canadian Airlines — then the country’s second-biggest carrier — and Air Canada. The plan was dropped after being ruled illegal by a Quebec court.
Onex also failed in its effort in 2007 as part of a consortium to buy Australia’s Qantas Airways Ltd.
Popatia said the new foreign ownership threshold — raised to 49 per cent from 25 per cent after amendments to the Canada Transportation Act — “had nothing to do with” its decision, stating that Onex Partners — the company’s flagship private equity fund — is the sole equity provider.
Analyst Benoit Poirier of Desjardins Securities said Onex might also look to acquire Transat A.T. The tour operator, which owns Air Transat, competes with WestJet for sun destinations and launched in 2017 a $750-million plan to develop a hotel chain in Mexico and the Caribbean.
“We believe it would be easier for WestJet to acquire Transat once the company is integrated within Onex, as unlocking Transat’s full potential could take a few years (three to five years) — which might be less suited for a public entity,” Poirier said in an investor note.
The Quebec-based travel company has been in buyout discussions with several suitors since last August, including Quebecor CEO Pierre Karl Peladeau, Montreal developer Groupe Mach and financial services company FNC Capital.
“We don’t speculate on any issues along those lines,” Sims said Monday.
WestJet’s current growth spurt could also generate profits to offset the rising cost of labour following the unionization of fight attendants and pilots.
“WestJet has been challenged by all this diversification that’s been crunched into this very short space of time,” said Robert Kokonis, president of Toronto-based consulting firm AirTrav Inc. “Shareholders were wondering whether WestJet could execute all these things.”
Private sector union Unifor said it would stand up for WestJet workers as it is sold to Onex, “a takeover specialist with a long history of cost cutting and restructuring at the companies it buys.”
Alberta Premier Jason Kenney weighed in Monday.
“By moving to private ownership, it is our hope that WestJet will have greater latitude to make long-term strategic investments, growing its fleet and global network of destinations, including direct overseas flights from Alberta,” Kenney said in a statement.
Analyst Doug Taylor of Canaccord Genuity said the Onex deal likely will not “dramatically alter” the competitive landscape.
“WestJet was generally well-funded and was already embarking on a large and highly competitive expansion plan. In our view, a private equity owner of an airline is likely to remain rational with respect to its approach to yields and profitability vs. market share,” he said in a note to clients.