Nearly 20 years after abandoning his hostile bid for Air Canada, Gerry Schwartz finally got his airline by agreeing to buy WestJet Airlines Ltd. for C$3.5 billion ($2.6 billion).

Schwartz’s private equity firm Onex Corp. agreed to pay cash for Canada’s second-biggest carrier, taking the company private in one of the buyout firm’s biggest deals. Onex offered C$31 a share, a 67% premium to the airline’s closing price May 10. The deal is valued at C$5 billion including debt, Toronto-based Onex said in a statement Monday.

“Onex is a very aviation-focused fund so they know the space,” said George Ferguson, a Bloomberg Intelligence analyst. “WestJet is looking for growth, which will be hard to find inside Canada as the market is relatively small.”

For Onex, the friendly deal gives the buyout firm the airline it has long sought, after making several investments in the aerospace sector, including Spirit AeroSystems Holdings Inc. In 1999, the firm tried to acquire Air Canada and merge it with Canadian Airlines. The C$2.4 billion hostile bid, with financial backing from AMR Corp.’s American Airlines, was eventually abandoned after an unfavorable ruling in the Quebec courts. Onex was also part of a group that failed to buy Australia’s Qantas Airways Ltd. in 2007.

Scott Deveau and Mary Schlangenstein, ©2019 Bloomberg L.P.

Strong Brands

“WestJet is one of Canada’s strongest brands and we have tremendous respect for the business,” said Tawfiq Popatia, a managing director at Onex said in the statement. “WestJet is renowned internationally for its unparalleled guest experience and employee culture.”

The surprise move comes as competition heats up in the Canadian airline sector, with several discount carriers entering the space. The sale also follows an announcement last month that tour operator Transat A.T. is seeking a potential sale. Transat rose 1 percent Monday, while Air Canada, the country’s biggest carrier, rose 4.6 percent. Calgary-based WestJet soared 61 percent to C$29.89 at 10:23 a.m. in Toronto.

WestJet’s stock has lagged behind Air Canada in recent years, as the bigger carrier has been one of the top stocks in Canada. Before Monday’s rally, WestJet had dropped 23 percent in the last five years, compared with a 336 percent gain for Montreal-based Air Canada.

WestJet suspended all financial guidance for the year due to the grounding of the Boeing Co. 737 Max. Chief Executive Officer Edward Sims has said there are no planned changes to any Boeing orders or deliveries.

WestJet’s earnings have come under pressure in recent years with the launch of several lower cost airlines in the country. WestJet has tried to capture some of that market itself with the launch of its own ultra-low cost carrier, Swoop. At the same time, it has expanded its offerings primarily to Europe with a fleet of Boeing 787s.

“They have dabbled in low-cost transatlantic flights but largely to the top of Europe,” Ferguson said. “Onex could be looking at the airline as a platform to develop low-cost long-haul which has strong interest from many parties.”

Distinct Culture

Founded in 1996 by a group of Western businessmen, including Clive Beddoe, the airline was originally modeled after Southwest Airlines as a low-cost carrier with a single fleet of 737 aircraft. A fun-loving corporate culture was a big part of that model. Airline attendants, ticketing staff and pilots would banter and joke with customers, a carefully cultivated branding designed to contrast with Air Canada. That relationship with employees has been tested in recent years as the airlines and flight attendants unionized.

“WestJet is in the middle of a significant transformation as they move to be a full-service airline with products from bare bones fares to high-end first class offerings on 787s,” Helane Becker, a Cowen & Co. analyst, said in a note Monday. “We expect shareholder approval” given the premium over Friday’s closing share price.

WestJet has purchase obligations of about C$4 billion for 44 737 Max aircraft and 7 787 firm orders, Becker noted. The company said May 7 it was on track to reach its margin expansion target of C$120 million this year. It’s also working toward an annualized savings target of C$200 million by the end of 2020.

©2019 Bloomberg L.P.

This article was written by Scott Deveau and Mary Schlangenstein from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

Photo Credit: WestJet now has three types of aircraft, including the Bombardier Q400 turboprop. The company is being taken private by an investor. WestJet