Two decades ago, Gerry Schwartz’s Onex Corp. tried to land a major airline deal, but the transaction fizzled after a dramatic battle that gripped corporate Canada and Bay Street. Now, with a $5-billion bid for Calgary-based WestJet Airlines Ltd., the private equity buyout specialist hopes to reel in a major prize in an industry he has been circling ever since.
“We see this as the white whale scenario for Gerry Schwartz … finally landing a major airline,” said Scott Chan, an analyst at Canaccord Genuity Corp. who tracks Onex, which tried unsuccessfully to buy and merge Canada’s two major airlines, Air Canada and Canadian Airlines, in 1999.
Monday’s bid for WestJet, which includes $31 per share in cash, a 67 per cent premium to Friday’s closing price, must win regulatory and shareholder approval, but is expected to close by later this year or early 2020.
“Given the premium valuation and, in our view, a limited list of potential other bidders, we believe the deal is likely to proceed on the stated terms,” said Doug Taylor, another Canaccord analyst, who noted that some potential bidders would be kept at bay by Canada’s foreign ownership restrictions for airlines, which cap individual foreign owners at 25 per cent and total foreign ownership at 49 per cent.
For Schwartz’s Onex, the acquisition of WestJet, whose commercial aircraft fly to more than 100 destinations in North and Central America, the Caribbean, and Europe, marks a significant entry into an industry around which the private equity player has been investing for years.
Past investments included Spirit Aerospace Systems, a Kansas-based manufacturer of structures for commercial and defense aircraft, which generated an internal rate of return of around 200 per cent for Onex following an initial public offering in 2014, and a stake in airline catering business Sky Chefs, which Onex sold to Lufthansa for $1.3 billion in 2001.
But the investments have not always been successful, with Onex investing in Hawker Beechcraft, an aerospace manufacturer that filed for bankruptcy in 2012.
A couple of airline investments that would have been among the most high profile in Canada never took place. In the summer of 1999, Onex made a $1.8 billion offer to buy Air Canada and merge it with then-rival Canadian Airlines in a transaction that was valued at $5.7 billion.
However, Air Canada, which hatched its own plan to buy Canadian Airlines, made several moves to complicate the Onex bid, including adopting a poison pill designed to drive up the price. The corporate battled landed in court, where Onex was rebuffed, and its bid withdrawn.
Air Canada subsequently took over Canadian Airlines in 2000, but the combined airline struggled, and filed for bankruptcy protection in 2003.
"Onex’s aerospace experience, history of positive employee relations and long-term orientation makes it an ideal partner for WestJetters." — Clive Beddoe, Westjet founder
Onex’s belated comeback of sorts, the multi-billion bid for WestJet, appeared to catch the market by surprise on Monday. WestJet’s shares shot up by more than 60 per cent before pulling back slightly to close at $29.61, within striking distance of the $31 per share bid. Behind the scenes, talks had been under way since March, when Onex approached the airline.
Analysts said the Onex bid is rich by airline standards, representing a premium to the valuations given to Air Canada and publicly traded U.S. airlines.
Frothy private markets, which Onex executives cited in a conference call with analysts last week — driven by “dry powder” looking to be deployed by global institutional investors — could have contributed to the premium offer for WestJet, according to a note published Monday by Canaccord.
WestJet would be Onex’s second recent public-to-private transaction, following on the heels of the acquisition of wealth manager Gluskin Sheff in March, Chan, the Canaccord analyst, noted.
“Privatizing tends to be easier to generate value longer term,” said Chan.
Onex has not yet spelled out its plans for WestJet, which has marketed itself as an airline where customers are treated well because employees are incentivized through opportunities for stock purchases and profit-sharing to take control of situations and solve problems.
In July, WestJet shareholders will have an opportunity to vote on the takeover at a special meeting. The Onex bid for the airline has already received the unanimous recommendation of WestJet’s board of directors, and Clive Beddoe, who co-founded WestJet in 1996 and remains the company’s chairman.
“Onex’s aerospace experience, history of positive employee relations and long-term orientation makes it an ideal partner for WestJetters, and I am excited about our future,” Beddoe said in a statement.
Tawfiq Popatia, a managing director at Onex, said WestJet is among Canada’s strongest brands.
“We have tremendous respect for the business that Clive Beddoe and all WestJetters have built over the years,” he said. “WestJet is renowned internationally for its unparalleled guest experience and employee culture.”
In addition to shareholder approval, the transaction must also receive the blessing of Transport Canada and the Canadian Transportation Agency.
Taylor, the Canaccord Genuity analyst, said the Onex acquisition would not dramatically alter the competitive landscape.
“WestJet was generally well funded and was already embarking on a large and highly competitive expansion plan,” he wrote. “In our view, a private equity owner of an airline is likely to remain rational with respect to its approach to yields and profitability (versus) market share.”
This time around, the assessment seems to be that Onex is a suitable buyer. Taylor titled his report: “An attractive exit at the hands of Onex.”
Copyright Postmedia Network Inc., 2019
