Air Canada Discloses Further Details Of The Rejected Two Billion Dollar Offer Made To Canadian Airli

21st Sep 1999

Air Canada, as part of its Circular to shareholders recommending the rejection of the Onex-AMR offer, disclosed that it had made a binding offer to Canadian Airlines on June 23, 1999, to acquire Canadian`s international routes, combined with extensive code sharing arrangements.
Canadian summarily rejected the offer by press release without any discussion or dialogue. Under the offer, Canadian would have received $400 million cash for its international routes which was in line with the $300 million to $500 million liquidity gap identified by Canadian. In addition, Canadian would have received a further $125 million cash for aircraft spares and related inventory. Air Canada also offered to assume $1.4 billion of debt and leases associated with aircraft operated on international routes.
No layoffs would have been necessary at Air Canada and job losses at Canadian would have been minimized to an estimated 1,400. These losses would have been handled through attrition and voluntary separation packages over a two-to three-year period. A significant number of Canadian employees would have been transferred to Air Canada to operate and run the purchased international operations.
In addition to the proposal, Air Canada had indicated it would be prepared to acquire a significant but non-controlling equity interest in Canadian as evidence of Air Canada`s confidence in Canadian`s future. Air Canada accordingly proposed a pro-competitive solution in that domestic competition between Air Canada and Canadian would have continued.
The offer would have resulted in a new, restructured, profitable and independent Canadian Airlines. The entire restructuring of the industry would have been made without changes to foreign ownership rules, Canadian competition rules, or the 10 percent rule against concentration of ownership of Air Canada`s voting shares.
“The strength of our recent financial results and our clear commercial and operational marketplace leadership has placed us in an enviable position versus Canadian Airlines, yet we felt our proposal provided a win-win-win situation for the issues facing American Airlines, Canadian Airlines and the federal government,” said Robert Milton, President and CEO of Air Canada. “We were disturbed by the summary rejection by Canadian Airlines, as we were convinced it held merit for all parties.
“The rejection of our offer and the announcement of the Onex-American Airlines bid within days of the rejection makes it clear that our offer was not seriously considered, despite providing for the survival of Canadian and safeguards for its employees. Canadian was not prepared to engage in any serious discussions with us, despite the Section 47 Order. Based on our information, American Airlines would have had veto over such a transaction—and presumably exercised it.”
Air Canada presented the International Route Offer to Canadian Airlines on June 23, 1999. Canadian let the offer lapse by its expiry date of July 23, and subsequently asked for an extension three days later, on July 26. This extension was granted by Air Canada on August 11. As provided by the Section 47 Order, Air Canada filed a copy of its Offer with the Minister of Transport on August 20, thereby making it public.
The Air Canada offer was rejected through a media comment within hours of it being filed with the Minister of Transport on August 20. This rejection was the final step in a chronology of events that began when Canadian Airlines approached Air Canada in January 1999 to initiate talks on a possible merger. Because of its veto rights over transactions involving Canadian, AMR was also involved in these discussions. After several meetings and significant financial and legal analyses, discussions ended in the spring of 1999. Air Canada was not prepared to enter into any transaction that would have involved a significant value transfer from its shareholders to Canadian Airline`s shareholders.
Revelation of the failed bid to buy Canadian Airlines` international operations was made as Air Canada considers various alternatives to the Onex-AMR offer, including a possible transaction with one or more third parties.



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