Transat accepts Air Canada's buyout offer in deal requiring shareholder approval

(Reuters) – Air Canada (AC.TO) said on Thursday that Canadian tour operator Transat AT Inc (TRZ.TO) accepted an all-cash bid of C$520 million ($396 million), or C$13 a share, over a rival’s higher offer in an agreement that still requires Transat shareholder approval.

Canada’s largest airline pursued Transat to boost its leisure travel business against the backdrop of a potential turnaround at rival WestJet Airlines (WJA.TO) under a new owner.

Montreal-based Air Canada was challenged by real estate developer Group Mach, which weighed in with a C$14 per share offer.

Transat stock surged more than 34% since exclusivity talks with Air Canada began in May, closing Wednesday at C$14.19 a share, as investors anticipated a sweeter deal.

Shares of Transat, which operates a charter airline, dropped 7.4% to C$13.07 in Thursday morning trading.

“The combination with Air Canada will give Transat new perspectives of growth, with the support of a strong network offering many options for connecting traffic,” said Transat chief executive Jean-Marc Eustache in a statement, arguing it represented “the best option for all our stakeholders.”

Mach’s offer had raised questions since the company first said it needed to secure C$120 million in government financing to complete the deal, a condition it waived on Tuesday.

The deal is also subject to regulatory approval.

The Air Canada deal requires Transat to pay a break-up fee of C$15 million if it backs out of the agreement in favor of a fully-financed offer of C$14 a share or more that is not matched by Air Canada.

Air Canada will need to pay Transat up to C$40 million if the required regulatory approvals are not obtained, under certain conditions.

Letko, Brosseau & Associates Inc, Transat’s largest shareholder, had urged the company to drop its deal with the Canadian carrier, The Globe and Mail reported last month.

Firm co-founder Peter Letko was not immediately available for comment.

Under the deal, Transat’s head office and key functions would be kept in Montreal.

The deal is expected to be completed early next year if the approvals are obtained.

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