Air Canada (TSX: AC) cancels takeover of Transat: what now?
Air Canada (TSX: AC) ended his shopping quest AT Transat (TSX: TRZ). The news sent Air Canada shares up more than 3%, while Transat shares initially fell more than 20% on the news.
Why has Air Canada’s stock price gone up?
Investors seem relieved that Air Canada is not going ahead with the purchase of the Canadian vacation company which is popular for its packages. Air Canada initially agreed to pay $ 18 per share in June 2019, but the arrival of the pandemic before the deal was closed changed the situation.
Air Canada renegotiated the price to $ 5 last year, giving Transat a valuation of around $ 200 million. That sounded like a lot, especially if COVID-19 vaccination programs get to the point where Canada and Transat’s key destinations are removing travel restrictions by the end of the year.
The return of the business traveler is a wild card for Air Canada, so the bet on vacationing travelers made sense. Once people can go on vacation again, there is a possibility that there will be a boom in vacation bookings.
It seems the market was concerned that Air Canada had too much to do in trying to integrate Transat while struggling to get back on its feet.
Why did Air Canada end the Transat agreement?
Air Canada has had problems with the European Commission (EC). The EC will not approve the agreement on the basis of competition concerns. He says the combination of Air Canada and Transat would reduce options and increase prices for flights between Canada and EU countries.
Air Canada said it had provided a “significant package of remedies” in an attempt to secure the EC’s blessing, but these were not sufficient to secure approval of the deal.
What’s next for Air Transat?
The Quebec company Air Transat could ask the government for help to remain independent. The company could also enter into discussions with other potential buyers. Transat is strongly targeting the Quebec tourist market, and the province is interested in buying the business. Pierre Péladeau, who directs Quebecor, a media and communications company, previously offered $ 5 per share.
He could have another chance to buy Transat.
Transat has already said it would need $ 500 million in financing if the deal with Air Canada is not approved. If Transat wants to remain independent, the firm will have to find the funds quickly.
Keeping Transat operational and based in Quebec will be important for the provincial and federal governments, so it is likely that a rescue of one form or another will emerge.
Should I buy Transat shares today?
The stock is trading near $ 4.50 per share at the time of writing, up from $ 5.50 before the news broke. Another $ 5 trade could certainly still be closed, so there is a chance for investors to make a nice profit on the difference.
Otherwise, Transat was trading for $ 16 before the pandemic. At the current level, the stock may appear undervalued. If the company gets adequate funding to get through the rest of the pandemic, the share price could take off with hopes of a strong rebound in vacation travel next year.
Risks remain, but contrarian investors may want to take a small stake in Transat shares at this level.
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Foolish contributor Andrew Walker has no position in any of the stocks mentioned.