Onex, AMR offer to unite Canada's 2 airlines

$669 million package would combine Air Canada with Canadian Airlines

Airlines

August 25, 1999|By BLOOMBERG NEWS

MONTREAL -- Toronto businessman Gerald Schwartz and American Airlines parent AMR Corp. offered yesterday to invest C $1 billion (US$669 million) to take control of Air Canada and Canadian Airlines Corp., a proposal that would leave Canada's struggling airline industry with one major carrier.

The Schwartz investment would come through Onex Corp., a publicly traded firm with stakes in airline caterer Sky Chefs and electronics maker Celestica Inc. Schwartz is president and chief executive officer of Onex.

Onex plans to merge the airlines and take a 31 percent share in the combined carriers. AMR's one-fourth voting stake in Canadian Airlines would drop to a 14.9 percent interest in the merged carrier.

An agreement would set the stage for a rescue of money-losing Canadian Airlines, whose board recommended stockholders acceptance of the proposal, and would give AMR the chance to recoup its Canadian Airlines investment by reinvesting in a healthier airline.

"Onex's track record with respect to buying troubled companies and fixing them up has been excellent," said Fred Pynn, a fund manager at Bissett & Associates Investment Management Inc. in Calgary, Alberta. His firm owns about 4 million Onex shares.

Stockholders of Air Canada would get C$8.25 in cash or one share of the new company for each of their shares.

Air Canada called the Onex proposal an "unsolicited, below- market offer." The carrier said it won't comment further until it has reviewed it. Air Canada stock rose C$0.15 to C$8.65 in late Toronto trading.

Canadian Airlines shareholders would get either C$2 in cash or 0.2424 share of the new company. Canadian Airlines stock climbed C $0.02 to C$1.85.

The bid comes two weeks after the Canadian government suspended competition rules to let the Canadian carriers discuss routes and fares in what some analysts called an effort to keep Canadian Airlines in business. The carrier, based Calgary, had a loss of C$137.6 million in 1998 and a C $125.6 million loss in the first six months of this year.

Air Canada and Canadian Airlines have been engaged in cutthroat competition for a decade, and neither carrier has generated financial results comparable with those of U.S. rivals. Canadian Airlines has had only one profitable year since 1988.

"We all know that the Canadian airline industry cannot sustain the status quo," Schwartz said.

Schwartz said the main reason for the carriers' poor financial performance is that they're trying to compete on almost every route in Canada. The duplication of flights has led to higher costs and narrower profit margins.

"It's very good news that someone is prepared to invest in Canada's airline industry," Industry Minister John Manley said in Ottawa. His office oversees the agency that would have to approve any transaction.

The offer could produce a showdown between American Airlines, which with Canadian Airlines is a partner in the Oneworld alliance, and UAL Corp.'s United Airlines, which has ties with Air Canada through the Star Alliance.

Phil Roberts, an airline consultant in Hayward, Calif., said the Canadian government might be reluctant to clear the proposal because it would limit domestic competition even though it could be "reasonable" from a financial standpoint.

The combined company would result in the reduction of about 5,000 jobs during the next 18 months, Schwartz said. The new company would be called Air Canada and be based in Montreal.

AMR, based in Fort Worth, Texas, paid C$246 million for the Canadian Airlines stake in 1994. It took a US$230 million charge in the fourth quarter of 1996 to write down the investment. AMR shares rose $1.25 to close at $62 yesterday.

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