Onex is buying WestJet for $5 billion and taking airline private

Canadian private equity firm Onex Corp. is buying WestJet Airlines Ltd. for $5 billion, including debt, and taking Canada’s second-biggest airline private.

The two companies announced Monday morning that a definitive agreement had been reached for the all-cash transaction, which is expected to close later this year or early 2020. Onex will acquire outstanding WestJet shares for $31, a 67 per cent premium when compared to Friday’s closing share price of $18.52. WestJet’s stock surged as much as 63 per cent on Monday to $30.24.

WestJet founder and chairman Clive Beddoe said in a statement Monday that the deal allows the airline to retain its commitment of “providing better options for the Canadian travelling public.”

“I am particularly pleased that WestJet will remain headquartered in Calgary and will continue to build on the success that our 14,000 WestJetters have created,” Beddoe said.

“Onex’s aerospace experience, history of positive employee relations and long-term orientation makes it an ideal partner for WestJetters and I am excited about our future.”

Onex had first approached the airline about the prospect of a takeover in March. After a committee of independent directors conducted a strategic review of the proposal, WestJet’s board unanimously agreed to accept the offer.

The blockbuster deal, which is subject to several conditions including regulatory and shareholder approval, comes as WestJet pursues an ambitious growth strategy that has left some analysts concerned about potential execution risk. The airline is looking to grow its business by launching an ultra low-cost carrier, Swoop, while at the same time purchasing widebody jets for international expansions.

WestJet’s stock has lagged in recent years, falling more than 46 per cent since a peak of $34.95 in December 2014.

Onex offer of $31 per share is likely one that shareholders wouldn’t have seen for several years, said AltaCorp Capital analyst Chris Murray.

“WestJet has been trading at such a discount because of concerns over near-term execution and some other strategic issues that this is a (share) price that I think you weren’t going to see for the next few years,” Murray said.

Whether the acquisition will significantly alter the Canadian airline landscape remains to be seen. In an interview with Bloomberg, Onex’s managing director Tawfiq Popatia said the acquisition “doesn’t represent any big strategic pivot or transformational change for the company.”

Murray said there are several paths Onex could choose when it comes to increasing the value of the airline.

“Whether that is to grow the company, shrink it, adjust the strategy or through asset monetizations, that still has to be determined,” he said.

“In the near term, we’re not expecting a lot of change from the path that WestJet has been on, and we don’t expect anything dramatic to be changing in the Canadian landscape.”

National Bank analyst Cameron Doerksen agreed, and said it will be “business as usual” for the airline, with no major changes to its strategy with the change in ownership.

Robert Kokonis, president of Toronto-based consulting firm AirTrav Inc., views Onex’s acquisition as an endorsement of WestJet’s growth strategy.

“I think that Onex sees the potential in WestJet’s evolution to a full-service, international player,” Kokonis said in an interview.

“Onex gets the business. They understand it has high fixed costs, it is capital intensive and that you can make money at it, as long as you have the right strategy and right team in place.”

While the deal is still subject to approvals, Doerksen said there is the likelihood of the deal closing is high.

“We see little risk that the Minister of Transport would block a deal given that there would be no change to the competitive dynamics as a result of privatization,” he wrote, adding that the chance of another competitive offer emerging is low because of Canada’s foreign ownership restrictions that limit potential buyers.

The isn’t the first time Onex has tried to acquire an airline. Twenty years ago it teamed up with American Airlines parent company AMR Corp. in a hostile $1.8-billion bid, plus the assumption of debt, to acquire and merge Canadian Airlines and Air Canada. The plan was dropped after being ruled illegal by a Quebec court.

Onex also failed in its effort in 2007 as part of a consortium to buy Australia’s Qantas Airways Ltd.

– With files from the Canadian Press.

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