Who might want to buy Air Transat? A look at some possible suitors

The company that owns Air Transat said Tuesday it has been approached by more than one interested party inquiring about a possible sale of the company. While the travel, hotel and airline operator isn't saying who, analysts and other observers have a few guesses about who the mystery buyers might be.

The company, officially known as Transat A.T. Inc., was founded 33 years ago in Quebec and today employs about 5,000 people. While it dabbles in a number of travel-related businesses, the company is probably best known for the Air Transat airline, which flies between Canada and various sun destinations to the south, along with transatlantic routes to Europe.

Canadians may know it as an airline, but the company calls itself an "integrated tour operator" because it is in the process of pivoting away from being dependent on selling plane tickets, and has branched into running tour companies and travel agencies, along with owning its own hotels.

Those hotel assets — not to mention hundreds of millions of dollars worth of cash on its balance sheet — mean that it may not be just another airline kicking the tires on the company.

Analyst Benoit Poirier of Desjardins Securities suggested in a note to clients Wednesday that the people interested in buying Transat may well be the same ones who have expressed an interest in buying British tour operator Thomas Cook.

U.S. private equity fund KKR, Swedish buyout group EQT Partners and China's Fosun International have all been publicly linked to wanting to buy a slice of the British tourism icon, so they could well be interested in taking over Transat — a company with a similar business model.

While certainly possible, Poirier thinks the most logical suitors for Transat would be other Canadian airlines. "Ultimately, we believe strategic buyers could generate more synergies than financial partners from a potential acquisition, which would imply a higher valuation for the company," he said.

Air Canada

Air Canada is an obvious possibility. CIBC analyst Kevin Chiang notes that Air Canada currently has an issue with its fleet in that 24 of its Boeing 737 Max jets have been grounded indefinitely. Buying Transat would give Air Canada "a way of getting capacity in the event the Max is grounded for longer than originally anticipated," he said. 

Taking over Transat's fleet of Airbus 330s and 321s could get Air Canada through its current turbulence, while buying profitable routes for the long run. "Air Canada has a lot of experience flying into [Transat's] markets and it would be relatively easy for AC to integrate these operations," he said.

WestJet

A similar case could be made for WestJet. Buying Transat would immediately give the Calgary-based airline bigger presence in two markets where they are weak — transatlantic and Quebec, Chiang said.

WestJet is trying to expand its long-haul routes such as flights to Europe, and Chiang says to do that they will need to buy more planes that can handle long haul flights such as Boeing 787s or something similar, something which could cost the airline up to $2 billion. "Acquiring [Transat] while adding a different fleet type, could be less costly," he said.

Sunwing

A third option could be rival vacation travel company Sunwing. Currently the Toronto-based carrier does not fly any transatlantic routes, but competes fiercely for business between Canada and sun destinations in the U.S. and Caribbean.

Chiang says Sunwing buying Transat could be "addition by subtraction" for the company because it would "remove a key competitor and bring a more rational competitive dynamic to the sun destinations markets."

Sunwing doesn't currently fly transatlantic, however, so any such deal would depend on their desire to start doing so.

Foreign airlines

The odds of a foreign airline making a move are low, analysts say, because foreign ownership rules for Canadian airlines mandate that no foreign company can own more than 49 per cent of a Canadian airline.

German-based TUI Group conveniently owns exactly 49 per cent of Sunwing, so Poirier thinks there could be a fit there. "The acquisition of [Transat] would allow TUI to increase its exposure to the transatlantic market while consolidating its leading position in the sun destinations segment," he said. 

Other travel companies

Hotel chains could also be in the mix. Transat has committed hundreds of millions of dollars to its plan to build thousands of hotel rooms in Mexico, the Dominican Republic, Jamaica and Cuba over the next few years — assets that could be attractive to a hotel chain.

In any such move, the airline portion of Transat's business wouldn't be the main target, but it's not out of the question that a major hotel chain could come calling. "We believe other hotel operators in sun destinations could be interested in vertically integrating their business by acquiring Transat," Chiang said.

Ultimately, the analyst community thinks the odds of a sale are quite high, since Transat's share price has lagged the core strength of the underlying business.

Toronto-Dominion bank analyst Tim James notes that while the hotel strategy may pay off in the long run, investors may not want to stick around long enough to find out, and would likely jump at the chance of selling their shares now for a modest premium.

"The sale to a private or larger strategic buyer, if it moves forward with the existing hotel strategy, could provide better short-term returns to Transat shareholders," he said.

Poirier also thinks the idea of a sale is a positive development. "We are pleased with the announcement yesterday as it supports our view that TRZ's current price is unjustified," he said. "We believe the probability of a divestiture is high and we recommend investors buy the shares."

Any sale would have to go get shareholder approval, including from Canada's Competition Bureau, and also the Quebec government which owns a significant stake in the airline with more than 2 million shares in the company via the provincial pension plan, the Caisse.

Transat's biggest shareholder, however, is Montreal based investment firm Letko Brosseau & Associates, Inc, which owns about 18 per cent of the company.

A request for comment by Letko on behalf of CBC News on Tuesday has yet to be returned.