Onex Corp. has been busily assembling a broad collection of companies that few investors have heard about – from Clarivate Analytics to Carestream Health to KidsFoundation Holdings – giving the Canadian private-equity company a relatively low profile among retail investors.
But Onex’s deal for WestJet Airlines Ltd., announced on Monday, will most certainly boost its profile, and perhaps give the stock price a much-needed lift after a 27-per-cent slide since July, 2017.
So far, so good: The shares rose 4 per cent on Monday, at a time when the S&P/TSX Composite Index lost 0.6 per cent over concerns about an escalating trade war between the United States and China.
For sure, Onex’s opaque business model can be off-putting for investors who insist on knowing the inner workings of all their holdings. With its own shareholder capital and money raised from outside investors, the company takes a large position in dozens of different companies and then tinkers with them to improve their performance.
That can mean changing management teams, tweaking strategies, merging one company with another, or taking just about any other approach that boosts returns. Onex can then spin out successes through initial public offerings, strike deals with other companies or simply hold on for a longer period.
Given that many of its operating companies are privately held, though, Onex can be a challenge to value. Among its holdings: KidsFoundation Holdings is a Netherlands-based European child-care-services company. Clarivate Analytics, which operates academic subscription services, completed a merger with Churchill Capital Group on Monday and will trade on the New York Stock Exchange starting Tuesday. Carestream Health designs health-care information-technology systems. And in March, Onex agreed to buy Toronto-based Gluskin Sheff + Associates Inc. for $445-million, adding high-end wealth management to its stable of companies.
Financial results can be bumpy, because profits are affected by deals, IPOs and the shifting fair value of the dozens of investments on Onex’s balance sheet. Last year, Onex reported a loss of US$796-million, down from a profit of US$2.4-billion in 2017 – and the share price has offered a discount to the net asset value of the company’s underlying parts.
But investing in Onex means betting on the acumen of a private-equity company that has been in the business for decades, rewarding long-term shareholders with index-beating gains.
The company, founded by Gerry Schwartz in 1984 with $50-million in funding, is now a behemoth with US$31-billion in assets under management. And while the share price has slumped over the past two years over concerns about private-equity valuations and rising competition among private-equity companies and pension funds, it’s hard to quibble over longer-term performance.
The shares have delivered gains of 564 per cent over the past 20 years (including dividends), which handily beats the 265-per-cent return for the S&P/TSX Composite Index and the 201-per-cent return for the S&P 500 over the same period.
Will the WestJet deal, which is expected to close later this year or in early 2020, add to Onex’s allure?
The $5-billion deal (including debt) is a rich one: Onex agreed to an all-cash transaction that values WestJet at $31 a share, or a 67-per-cent premium to the airline’s trading price on Friday.
Doug Taylor, an analyst at Canaccord Genuity, noted that the takeover price values WestJet at 5.5 times estimated EBITDA (or earnings before interest, taxes, depreciation and amortization), which is above U.S. peers in the airline industry. The valuation looks even heftier based on forecasted earnings.
There is risk here, no doubt. Airlines are notoriously volatile when the economic outlook turns cloudy – and the current outlook is being shaped by trade wars, higher interest rates and an economic expansion that is about to become the longest in U.S. history.
Yet sophisticated investors have been giving airlines another look in recent years. In one of the most noteworthy shifts, Warren Buffett – once a vocal critic of the sector – has taken huge positions in Delta Air Lines Inc., Southwest Airlines Co., United Continental Holdings Inc. and American Airlines Group Inc.
Some observers believe Mr. Buffett, renowned as one of the greatest living investors, could be planning to buy one airline outright, in recognition that today’s airlines operate within a relatively cozy oligopoly that ensures greater profitability and stability through economic cycles.
WestJet, then, could fit in with a similar strategy – and Onex’s deal comes at a time when the Calgary-based airline has been struggling with labour issues, rising costs and a foray into high-end business travel that seems at odds with its roots in discount travel.
WestJet’s share price fell 40 per cent from October, 2017, to December, 2018, under the weight of these concerns. Prior to the announcement of Onex’s deal for the airline, WestJet’s share price was still down 33.5 per cent over the past 19 months. Perhaps Onex has found a tarnished bargain here.