Onex Corp. slashed its proposed offer for WestJet Airlines Ltd. as a result of the grounding of the airline’s Boeing 737 Max aircraft, and other uncertainties, before agreeing to pay $31 a share for Canada’s second-biggest carrier.
The Toronto-based private equity fund made a written, non-binding offer on March 25 of $35.75 a share to buy the Calgary-based airline, with conditions that included satisfactory due diligence. The offer followed a few weeks of talks, but coincided with the grounding of the world’s fleet of 737 Max planes after two fatal crashes that killed 346 people.
The two sides eventually agreed on a price of $31 a share – or $3.5-billion – in a friendly deal announced on May 13. Shareholders of WestJet will vote on the Onex offer on July 23.
Two-thirds of WestJet investors must approve the deal if Onex is to take control of the airline, which is trying to reshape itself as an international carrier. The takeover must also be approved by the federal Competition Commissioner, the Minister of Transport and the Court of Queen’s Bench of Alberta.
The private equity company founded by Gerald Schwartz approached WestJet in 2016 and held several meetings at which non-binding proposals to buy the company were discussed. Talks ended without resolution, but were restarted after Onex contacted WestJet in March, 2019, and made the non-binding offer.
After a month of examining WestJet’s operations, Onex on April 30 cut its offer price “taking into account, among other things, the results of Onex’s due diligence investigations to that point in time and uncertainties relating to the 737 Max grounding, and provided [WestJet] with Onex’s proposed purchase price, which was less than the indicative price initially provided by Onex,” according to WestJet’s information circular to shareholders, which was filed to regulators late on Friday afternoon.
Onex cut its offer price after assessing unspecified confidential documents made available to it under the due-diligence agreement, in addition to uncertainties related to the grounding of a key aircraft, the 737 Max; The WestJet document did not say by how much Onex cut its offer before agreeing to raise it to $31 after several days of negotiations.
WestJet’s board of directors unanimously recommended the $31 offer, relying on favourable opinions of the deal from advisers Bank of America Merrill Lynch and Canadian Imperial Bank of Commerce. The $31 offer was a 67-per-cent premium over the May 10 closing price on the Toronto Stock Exchange but below the $33 high reached at the end of 2014.
The board and the special committee that evaluated the offer cited the following factors: that the all-cash takeover offers more value to shareholders than they would receive should the business continue as a publicly traded company, and that a better offer is “highly unlikely,” given the rules against foreign takeovers of airlines.
WestJet operates 13 737 Max planes and has another 57 on order. After the model was grounded, WestJet suspended 2019 financial guidance and cancelled several routes. It’s not clear when the planes will be cleared to resume flying.
WestJet was founded as a low-cost carrier in 1996 with three planes and 220 workers. It now has more than 14,000 employees, 180 planes and flies to more than 100 destinations.
WestJet in the past three years began adding bigger planes and longer routes in a bid to compete with Air Canada for business and international travellers. Last year, WestJet launched Swoop, a low-cost subsidiary intended to attract budget-conscious travellers.
However, WestJet has struggled amid the transformation. Between 2015 and 2018, profits slumped to 80 cents a share from $2.92, even as revenue rose by 29 per cent to $4.7-billion.
Ed Sims, WestJet’s chief executive officer, said when the deal was announced the company’s plan would not change under Onex, and that a private structure is a better model in which to run an airline, which is capital-intensive and has long-term strategic horizons.
A representative of WestJet’s largest shareholder, Silchester International, which holds 16.5 per cent of WestJet, declined to comment. WestJet’s second-biggest investor, Letko Brosseau and Associates, owner of 10 per cent of the company, was not available to comment.
Spokespeople for WestJet and Onex declined to comment.
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