Air Canada, Transat call off $190M deal after European approval denied

Transat AT is considering its options after a deal that would have seen Canada's largest airline acquire its smaller travel rival officially died on Friday with word that Air Canada had come to a mutual agreement with Transat to terminate their planned merger.

Both companies released statements announcing the termination of the $190-million deal initiated more than two years ago and amended due to the weight of the COVID-19 pandemic on the transportation sector.

The end of the deal comes after Air Canada and the tour company that operates Air Transat were advised by the European Commission (EC) that it would not approve the transaction.

Air Canada said it offered an enhanced package of remedies beyond what has traditionally been accepted by the commission in previous airline mergers.

"Following recent discussions with the EC, it has become evident, however, that the EC will not approve the acquisition based on the currently offered remedy package," the company said in a statement.

"After careful consideration, Air Canada has concluded that providing additional, onerous remedies, which may still not secure an EC approval, would significantly compromise Air Canada's ability to compete internationally, negatively impacting customers, other stakeholders and future prospects as it recovers and rebuilds from the impact of the COVID-19 pandemic."

Ottawa engaging in 'active' discussions: Alghabra

Transport Minister Omar Alghabra said Friday that the federal government's priority is to protect jobs in Quebec and across Canada, and to support a competitive air transport sector.

"We are currently in active discussions regarding financial support options for many Canadian airlines, including Air Transat," Alghabra said in a statement shared on Twitter. "I spoke directly with Air Transat and we are examining next steps."

The government has come under fire by the country's travel sector for failing to provide direct financial relief to airlines during a time when their operations have shrunk dramatically and losses have mounted.

The European review was the final hurdle in the regulatory process after the Canadian government approved the transaction on Feb. 12 while imposing conditions.

Air Canada will pay Transat a $12.5-million termination fee, while Transat won't be required to pay Air Canada anything if it enters into another deal in the future.

Transaction 'complicated' by pandemic: Transat CEO

Montreal-based Transat said it is disappointed by the failure to complete the transaction but is confident of the company's future.

"This transaction ... was complicated by the pandemic, and, ultimately, Air Canada reached its limit in terms of concessions it was willing to provide the European Commission to satisfy their competition law concerns," stated Transat CEO Jean-Marc Eustache.

He said the deal would have resulted in benefits to shareholders, customers and other stakeholders.

No longer constrained by terms of the agreement, Eustache said the company he co-founded is free to take necessary steps to ensure its future, including obtaining at least $500 million in long-term financing.

The company will continue to preserve cash and has put in place a $250-million short-term subordinated credit facility, which matures on June 30.

Transat is in negotiations for long-term funding, including under the Large Employer Emergency Financing Facility, and through support from the Canadian government for businesses in the travel and tourism sector.

"Discussions on both topics are at an advanced stage and Transat's management is confident that a satisfactory financing will be secured in the coming weeks," it said.

EU official cites competition concerns

On Friday, European Union antitrust chief Margrethe Vestager said Air Canada offered insufficient concessions to address competition concerns about its planned acquisition,

Vestager said she had strong concerns about the impact of the deal that Air Canada had failed to allay.

"While the coronavirus outbreak has strongly impacted the airline sector, the preservation of competitive market structures is essential to ensure that the recovery can be swift and strong," she said in a statement.

"The proposed transaction would raise competition concerns on a large number of transatlantic routes. Based on the results of the market test, the remedies offered appeared insufficient."

Operations grounded over flight suspensions

Transat's operations have been grounded since a suspension of flights following the Canadian government's request in January to stop travel to Mexico and the Caribbean because of the pandemic.

Air Canada is resuming idled operations in May and Transat expects to do so in mid-June with a pick-up in volume to Europe.

Transat is now free to hold discussions with potential buyers, including Pierre Karl Peladeau, whose investment company, Gestion MTRHP Inc., previously made a proposal to acquire all of the issued and outstanding shares of Transat for $5 a share.

Like many tourism-related companies, Transat has been severely impacted by lockdowns during the pandemic.

"However, the arrival of vaccines brings us a light at the end of the tunnel, and Transat is well-positioned to bounce back," Eustache said.

As a smaller operator, Transat said it can be "nimble and quickly adapt to ever-shifting market conditions."

In addition, pent-up demand for leisure travel should help as this part of the business is expected to recover sooner than business travel, he said.

"In close to 40 years of existence, we have traversed numerous crises and each time, we emerged stronger than before, demonstrating our resilience as an organization. We look forward to a safe and healthy future, as we hopefully put this pandemic behind us."