Quebec developer seeks provincial backing for rival Transat takeover bid – The Globe and Mail

Quebec developer seeks provincial backing for rival Transat takeover bid - The Globe and Mail
Transat bid takes twist as Quebec developer tops Air Canada offer
Transats head office, executive team and decision-making centre would remain based in Montreal, Mach said.

An Air Transat flight takes off from Trudeau airport in Montreal in 2010. John Mahoney / Montreal Gazette

Quebec firm makes rival offer for Air Transat

Quebec property developer Groupe Mach Inc. said on Tuesday it’s ready to conditionally offer $14 a share in cash for the owner of Air Transat, topping Air Canada’s proposed $13-a-share bid. Groupe Mach’s proposal values Transat at more than $1 billion, according to a press release issued Tuesday.

Group Mach Inc. on Tuesday went public with an offer of $14 a share for Transat, conditional on Quebec government financing, topping a bid made by Air Canada, which since May 16 has been in exclusive talks to buy Transat for $13 a share or $520-million. That amount was criticized by some investors as too low or opportunistic.

Air Canada and Transat said May 16 they agreed to hold exclusive talks over a potential deal for the Montreal-based tour and airline operator. The companies have 30 days to negotiate a definitive agreement.

Were analyzing the information in Machs press release this morning and for the moment we have nothing to add, said Patrick McQuilken, a spokesman for the Fonds de solidarité FTQ, a Montreal-based investment fund with $14.8-billion in assets and a 12-per-cent stake in Transat, according to the latest filing.

Mach’s offer is subject to a number of conditions — not the least of which is the company’s ability to obtain $120 million in financing from the Quebec government. Mach said Tuesday it plans to file a business plan with Investissement Québec by June 10. There was no immediate comment from Investissement Québec.

Quebec Premier François Legault, who was one of Air Transat’s co-founders in the 1980s before making the jump into politics, said he’s heartened by the fact Mach and Air Canada are both based in the province.

Still, he cautioned his government won’t automatically back Mach’s proposal because the need to protect a head office no longer exists.

In a statement on Tuesday morning, Group Mach called on Transat to end talks with Air Canada. The would-be buyer said it would preserve Transats Montreal head office, all 5,000 jobs, and its divisions: the airline, travel agency and hotel being developed in Mexico.

“Initially, we were worried about an offer coming from outside Quebec, and we were ready to help a Quebec group. Now we have two Quebec groups, so I don’t think the government must necessarily be interested” in financing a rival bid, Legault told reporters at the National Assembly. “If there is a good deal, an interesting investment for Investissement Québec, it can be considered. But I don’t see the urgency.”

Transat operates Canadas third-biggest airline, with 40 jets, and sells vacation packages to about 60 destinations. Transat is building a beach-front resort in Puerto Morelos, Mexico, its first step toward owing or managing 5,000 hotel rooms by 2024.

Investissement Québec will analyze Mach’s financing request “on merit,” spokesperson Isabelle Fontaine said Tuesday in an email.

Group Mach said its hostile bid requires $120-million in financing from government of Quebec and will include a 25-per-cent investment from Spanish real estate developer TM Grupo Inmobiliario, which will help expand Transats resort business.

Transat will issue a statement shortly, spokesperson Christophe Hennebelle said Tuesday by telephone. Discussions with Air Canada are continuing, he added.

Montreal money manager Letko Brosseau and Associates has said Transat should wait until it restores profitability before selling while PenderFund Capital Management of Vancouver said last week the company is worth at least $15 a share.

Mach has lined up Spanish property company TM Grupo Inmobiliario as a partner to help run Transat. Under a proposed deal, TM would invest $15 million in Transat and contribute three Mexican hotels in exchange for a minority stake in the company. TM is the largest residential and leisure real-estate developer in Spain, as well as a preferred hotel supplier of Transat in Mexico.

Transat’s goal of expanding into hotel development and ownership is at the heart of Mach’s interest for the company.

Transat has agreed to pay Air Canada a $15-million fee if it ends the agreement or accepts another bid. Air Canada will pay Transat $40-million if the deal is rejected by government or regulators.

Within six years of the deal closing, a Mach-owned Transat would operate about 12,000 hotel rooms — more than double the 5,000 envisaged under Transat’s current strategic plan. As recently as March, Transat had estimated the hotel strategy would require investments of US$750 million by 2024.

The Air Canada offer requires support from two-thirds of Transat shareholders, meaning the Quebec investors Letko Brosseau, FTQ and the Caisse have enough votes to turn down the deal.

Under the terms of its preliminary agreement with Air Canada, Transat agreed last month to limit “the undertakings and expenses” relatied to its hotel strategy during the 30-day exclusivity period.

Group Mach owns and develops real estate in Quebec, Ontario and Florida. Its portfolio includes Montreals Sun Life Building, CIBC Tower and the former CBC headquarters.

Mach aims to build a “global leading vertically integrated leisure travel brand” under the Transat banner, according to Tuesday’s statement. Transat’s head office, executive team and decision-making centre would remain based in Montreal, Mach said, adding that it is committed to reassure the provincial government that Quebec’s interests are “truly protected.”

The Toronto stock market regulator, Investment Industry Regulatory Organization of Ontario, halted trading in Transat shares on Tuesday pending company contact.

“The public markets are not the proper setting for Transat’s 2018-2022 strategic plan, particularly its hotel development strategy, which shall require several years for any meaningful returns to be realized in face of pressures of immediate results from the public markets,” Mach said.

It will be interesting to see if Transat terminates its [letter of intent] with Air Canada now that it has received a firm offer from Mach, Mr. Poirier said.

Mach said Tuesday it approached Transat about a potential negotiated transaction in January and followed up with a letter of intent to the company’s board of directors on Feb. 7.

For Air Canada, these benefits include access to a fleet of new Airbus jets, with more on the way, and the prospect of eliminating an aggressive competitor.

Transat would need to pay Air Canada $15 million if it accepted an “unsolicited superior proposal” and terminated its deal with Canada’s largest airline, according to the companies’ May 16 statement.

A call to the Caisse de dépôt et placement du Québec, which is Transats fourth-biggest owner at 6 per cent, was not immediately returned.

Mach’s real-estate assets include such properties as Montreal’s Sun Life Building, CIBC Tower and Le St-James Hotel. The company is also developing the Quartier des lumières on the site of the old Radio-Canada tower near the Jacques-Cartier Bridge.

Transat agreed to halt spending on the project during the talks with Air Canada, a sign the buyer is not interested in the resort business.

MONTREAL — Quebec real estate developer Group Mach Inc. has outbid Air Canada by offering a $527.6-million takeover proposal for tour operator Transat AT Inc. which includes trying to convince the Quebec government to finance nearly one-quarter of the purchase.

TM of Spain builds holiday homes in the Mediterranean and operates hotels in Mexico under the brand The Fives Hotels and Residence.

The $14 per share offer comes after Transat announced last month it was in exclusive 30-day negotiations to be acquired by Air Canada for $13 per share or about $520 million.

Trading in Transat shares was halted Tuesday morning. The shares closed at $11.84 on the Toronto Stock Exchange on Monday.

Mach said the proposal is the culmination of a process that began when it approached Transat in January.

Under its offer, Mach committed to keep Transats head office, executive team and decision-making hub in Montreal — all essential, it said, if the Montreal developer hopes to get the $120 million in financing it seeks from Quebec.

Mach chief executive Vincent Chiara told The Canadian Press he aims to continue Transats current business operations, with no layoffs or selloffs planned.

"The airline, for now, is definitely an integral part of that business," he said Tuesday. "Itll be important to keep that…The business plan is to get the passengers to their destinations, selling packages which include the hotel portion."

Key to the deal would be proposed minority partner TM Grupo Inmobiliario, a Spanish real estate developer that would roll over its three hotels in Mexico to Transat, according to Mach.

TM would contribute about $15 million in cash in exchange for a minority equity stake in Transat after the proposed agreement closed, Mach said. That would cover the $15-million break fee — built into the Air Canada arrangement — that Transat would incur by accepting the higher bid.

Chiara said he has spoken with officials at Quebecs economic development ministry and Investissement Quebec who "seem pretty open to our proposal."

He had harsh words for how Transat has handled its $750-million plan, unveiled in 2017, to develop a hotel chain in Mexico and the Caribbean.

"We dont understand why they havent started executing. They havent started the construction of the hotel which they propose to build," he said.

"Being in a different country and dealing with different laws and different authorities, I think theyre having a hard time," he said, pointing to TMs experience as the solution baked into his would-be deal.

Mach, a prominent developer in Montreal, has little experience beyond the provincial borders, with one residential development under construction in the Ottawa area and about 2,000 units in Tampa Bay, Fla., Chiara said.

He added that Transats hotel rollout was ill-suited for the public market. "Its going to be hard for them to show results on a short-term basis and their stock will continue to be penalized."

Transats biggest shareholder at more than 18 per cent ownership, Letko, Brosseau and Associates and PenderFund, opposes the deal with Air Canada, which has the first right to match Machs bid.

"However, the offer provided by Mach seems to have the support of the Quebec government," said analyst Nauman Satti of Laurentian Bank Securities in a note to investors.

"Furthermore, the offer from Mach is less prone to regulatory scrutiny from the Competition Bureau as compared to the deal with Air Canada."

Benoit Poirier, an analyst with Desjardins Securities, said in an investor note that "we believe Air Canada could ultimately offer a better price for Transat given the strong rationale behind the transaction and the potential for cost synergies with its operations."

"It will be interesting to see if Transat terminates its letter of intent with Air Canada now that it has received a firm offer from Mach," he said.

Industry observers previously cast doubt on whether another bidder would upset the proposed merger between Air Canada and Transat. Requisite reviews by federal transport and competition regulators were equally unlikely to derail the process, analysts said.

They also said consumers would likely see little change in their travel choices or ticket prices if Canadas biggest airline buys Transat, which offers vacation packages, hotel stays and air travel under the Transat and Air Transat brands and whose airline unit was co-founded in 1986 by current Premier Francois Legault.