/Air Canada files challenge over Onex’s $5B purchase of WestJet

Air Canada files challenge over Onex’s $5B purchase of WestJet


Air Canada is raising concerns that WestJet Airlines Ltd. may not be Canadian enough to comply with federal airline ownership rules if regulators approve Onex Corp.’s $5-billion purchase of its top rival.

Canada’s largest airline last week filed a challenge with the Canadian Transportation Agency (CTA) over Onex’s proposed acquisition of WestJet, arguing the Toronto-based private equity firm’s governance rules and the “opaque” transaction structure could expose WestJet to foreign control or influence.

Onex, which failed to buy Air Canada in a hostile takeover 20 years ago, announced the friendly deal with WestJet in May and has since won approval from the Competition Bureau and WestJet shareholders. But the complaint to the CTA adds a regulatory hurdle and potential delays to a deal analysts expected to close in late 2019.

The acquisition was valued at $31 a share, or $5 billion including debt, Onex said at the time.

Air Canada noted that Onex’s by-laws require only 25 per cent of its board to be Canadian when federal law requires no less than 50 per cent of airline board members be Canadians appointed by Canadian shareholders.

“For some airlines to be required to operate under one set of rules and others under a different one, would not only unfairly skew competition, but would harm the interest of Canadians,” Air Canada general counsel David Perez wrote in an Aug. 30 letter to the CTA and Transport Canada.

Federal law also stipulates foreign investors own no more than 49 per cent of a Canadian airline, with single investors or foreign airlines holding no more than 25 per cent of the voting shares or interest.

Onex founder and chief executive Gerry Schwartz indirectly holds all the company’s multiple voting shares. But Air Canada questioned who would really control WestJet if the Onex deal wins approval.

For some airlines to be required to operate under one set of rules and others under a different one … would harm the interest of Canadians

Air Canada general counsel David Perez

Should it go forward, WestJet would be 100 per cent owned by Kestrel Bidco Inc., a private investment corporation that’s majority-owned by Onex. Co-investors in that entity could have significant rights or power to exert control, Air Canada argued in an Aug. 15 letter.

In that context, it brought up the recent trans-border joint venture between WestJet and Delta Airlines, adding it could “contribute importantly to the influence and control the foreign airline could exert” given that Delta wouldn’t be precluded from investing under this structure.

Onex did not address a question on whether it’s confident the transaction will not break foreign ownership rules. In a statement, it said it is engaging with the CTA in the approval process and is pleased with previous approvals from the Minister of Transport and the Competition Bureau.

WestJet expects the transaction to close in late 2019, assuming “timely” approval from the CTA, spokeswoman Lauren Stewart said in an email.

“As the deal remains under regulatory review, we will not be providing further comment,” Stewart said.

The complaint comes at an unusually active period of deal-making in Canada’s airline sector. Air Canada is in the midst of trying to secure regulatory approval for its own $720 million deal to buy holiday travel company Transat A.T. Inc., a deal that will face scrutiny from the competition watchdog over the joint entity’s market share for trans-Atlantic flights.

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