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Air Canada's deal to buy Transat AT, if it clears regulatory hurdles and wins approval from Transat shareholders, could proceed in early 2021.

Paul Chiasson/The Canadian Press

Air Canada is still looking to take Transat AT Inc. over despite the COVID-19 pandemic that has rocked the airline industry, but it will pay far less than originally expected.

The two companies announced Saturday they’d agreed on revised terms that would see Air Canada pay $5 a share for the parent company of Air Transat, compared with the $18 a share originally pledged in its takeover bid.

That brings the total price of the takeover to $190-million, down from $720-million previously.

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“This is the worst crisis since the founding of Transat 33 years ago, and with a second wave of the pandemic underway, the timing of an eventual recovery remains uncertain,” Transat president and chief executive Jean-Marc Eustache said in a statement.

“More than ever, having a national airline with the scale to weather current industry turbulence, which is expected to continue for several years, is in the best interests of our shareholders, customers, employees and other stakeholders.”

The deal is endorsed by Transat’s board of directors and would allow shareholders to be paid in either cash or Air Canada shares.

It must be approved by two-thirds Transat’s shareholders, who will vote in an extraordinary assembly in early December. On Saturday, the company did not indicate whether its major shareholders, which include Letko Brosseau, the Fonds de solidarité FTQ and Quebec’s pension fund manger, the Caisse de dépôt et placement du Québec, supported the deal.

The deal takes place under a vastly different set of circumstances than were in place when the shareholders of the Quebec-based tour operator voted in favour of the previous deal in 2019. The pandemic has grounded flights, while 14-day quarantine restrictions remain in place for anyone arriving in Canada internationally.

Air Canada said in a news release that the pandemic has had a devastating effect on the aviation industry and the value of airlines and their assets, but it still wants to proceed with the acquisition “at a reduced price and on modified terms.”

“This combination will provide stability for Transat’s operations and its stakeholders and will position Air Canada, and indeed the Canadian aviation industry, to emerge more strongly as we enter the post-COVID-19 world,” Air Canada president and CEO Calin Rovinescu said in a statement. Before the pandemic, the transaction would have allowed the group to hold a 60-per-cent share of the transatlantic market from Canada. Air Canada and Transat would overlap on certain sun destinations in addition to having a grip on air travel in Montreal.

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The deal could be concluded in early 2021 if it is approved by Transat shareholders and regulators in Canada and the European Union. The deadline to secure the regulatory approvals has been pushed from late December to Feb. 15.

The European Commission’s antitrust body, which is investigating the proposed merger, has not indicated whether it would give the green light.

Air Canada also approved $250-million in increased borrowing by Transat pending the completion of the merger.

The $5-a-share purchase price represents a 31.6-per-cent premium over the stock’s 20-day weighed average. Transat shares closed at $3.83 on Friday.

The agreed-upon price is one that is reasonable for both parties, according to Karl Moore, a professor in McGill University’s Desautels Faculty of Management, who said the deal would never have closed at the original $18 share price.

“We can no longer refer to the conditions that prevailed before the health crisis,” Prof. Moore said in a phone interview.

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“The aviation industry is in the darkest period in its history.”

Air Canada will have to pay Transat a $30-million break fee if it terminates the deal, while Transat will have to pay $10-million if it accepts a firm offer of $6 a share or better that is not matched by Air Canada.

This report by The Canadian Press was first published Oct. 10, 2020.

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