Air Canada is challenging WestJet Airlines Ltd.’s $3.5-billion acquisition by Onex Corp., arguing in a filing to the country’s transportation regulator the deal breaches federal rules that limit foreign ownership of carriers.
In May, Toronto-based Onex made its long-coveted leap into aviation with an agreement to pay $31 per share for WestJet, which would operate as a private company.
Air Canada said in a letter to the Canadian Transportation Agency (CTA) that co-investors in Kestrel Bidco Inc. — the Onex subsidiary that is buying WestJet — may come from outside the country, amounting to a “serious risk” — though some experts view the filing as a delay tactic as the country’s biggest airline grapples with its own regulatory gauntlet in a deal to acquire travel company Transat A.T. Inc.
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Federal legislation limits foreign ownership of a Canadian airline to 49 per cent, with a maximum of 25 per cent for any one foreign investor. Onex, which managed $23.2 billion of invested capital as of Dec. 31, is a private equity firm whose funds include cash from foreign investors.
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The “opaque nature” and “flexibility” of the takeover’s private equity structure introduces a “significant risk” that non-Canadian co-investors could have de facto control of WestJet, Air Canada lawyer David Perez said in the Aug. 15 filing, obtained by The Canadian Press.
Though co-investors can hold only a minority stake, “Onex lacks necessary internal controls to ensure that WestJet remains Canadian,” the letter states, citing the possibility of shareholder veto rights, unanimous consent requirements and corporate dependence on foreign financing — all of which “can skew control.”
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Currently, Onex chief executive Gerry Schwartz holds all of the outstanding multiple voting shares (MVS), which entitle the holder to elect 60 per cent of Onex’s board. If he steps down, however, those shares will immediately lose most of their rights, the letter says.
“The potential for the MVS extinguishment is real given Mr. Schwartz’s current career stage. At 77 years old and having served as CEO since 1983, his eventual retirement should not be considered a remote eventuality,” Perez writes.
Onex said in an email it is “pleased the deal has received approval” from federal Transport Minister Marc Garneau and the Competition Bureau.
“The arrangement is still subject to the receipt of the Canadian Transportation Agency’s review of ownership structure,” noted WestJet spokeswoman Lauren Stewart.
WestJet shareholders approved the proposed acquisition in July, with 92.5 per cent voting in favour. The same month, an Alberta court approved the deal, which Onex and WestJet expect to complete following further regulatory green lights later this year.
Air Canada’s own bid for Transat is moving comparatively slowly through the approvals process.
The Superior Court of Quebec last week granted a final order approving the takeover following a big thumbs-up by shareholders in August, but the $720-million deal — which would leave Air Canada with about 60 per cent of the transatlantic market — is expected to face intense scrutiny from the Competition Bureau and other regulatory authorities, including in Europe, with closure expected as late as May 2020.
Robert Kokonis, president of Toronto-based consulting firm AirTrav Inc., said Air Canada’s CTA filing “may be more of a delay tactic” as it tries to push through the Transat purchase.
“Air Canada certainly sees the Onex deal as really providing additional strength to WestJet’s international expansion program,” Kokonis said.
“If they have a bona fide complaint, then it would potentially require Onex to go back and possibly restructure the deal, which means a delay in getting the final approvals,” he said. “I don’t think there’s any risk at all on the deal being approved, but… it would give Air Canada a bit more lead time to get that deal squared away before looking down the sights of an Onex-WestJet deal.”
WestJet, founded as a no-frills regional upstart in 1996, has set its sights on Air Canada in recent years, challenging the carrier’s dominance on international routes by adding transatlantic flights, wide-body planes and premium fares.
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