Seeker Posted November 28, 2003 Share Posted November 28, 2003 Cerberus rebuffed Li's equity offer Gesture by winning Air Canada bidder was refused due to holding period: sources Paul Vieira and Barry Critchley Financial Post Friday, November 28, 2003 ADVERTISEMENT Shortly after he won the bidding process for Air Canada, Victor Li offered the loser, Cerberus Capital Management, a chunk of his stake -- only to be turned down because the hedge fund would be prohibited from selling the equity for at least 18 months, the Financial Post has learned. It's the latest revelation to emerge about Cerberus and its attempt to reopen the bidding process for the insolvent airline, after losing out to Mr. Li's Trinity Time Investments group. Documents detailing Cerberus's initial bid, dated Sept. 25, revealed the fund: offered to pay $500-million for a 22.2% economic interest and underwrite a rights offering of another $500-million; would install Brian Mulroney, the former prime minister, as a director on a revamped board; intended to sell Air Canada subsidiaries -- notably Aeroplan, the frequent-flyer program; Jazz, the regional carrier; and aircraft maintenance arm -- in an effort to "optimize shareholder value;" and asked that regional jets be operated by pilots at Jazz, who earn less than their counterparts at the mainline carrier. Mr. Li's gesture toward Cerberus was made at a meeting convened by Air Canada, after the fund notified the airline it was unhappy with the result of the four-month equity solicitation process and planned to launch a counteroffer, sources said. Mr. Li, son of Hong Kong industrialist Li Ka-shing, was selected on Nov. 8 by Air Canada's board, by agreeing to take on a 31% stake in exchange for $650-million. Sources familiar with the meeting, held days after the board's decision, say Mr. Li offered less than a third of his stake to Cerberus as a gesture of goodwill. The only condition was that Cerberus would be banned from trading the stock for 18 months. Cerberus, in turn, said it would entertain the offer only if the trading ban were cut to six months. That counteroffer was rejected. Calls to Cerberus representatives yesterday were not returned. The information provided by independent sources add details to the latest report from Air Canada's court-appointed monitor, Ernst & Young. The monitor said a meeting took place between representatives for Air Canada, Mr. Li, Deutsche Bank (which is slated to underwrite a $450-million rights offering under the Trinity offer) and Cerberus. The topic was the hedge fund's participation in the offering, which gives creditors a chance to buy stock in the restructured airline on the same terms as Mr. Li. The monitor said following initial discussions, Cerberus warned it would submit a revised offer for Air Canada unless talks resulted in it "receiving a participating interest." The hedge fund, named after the three-headed dog that guarded Hades in Greek mythology, has since tabled two revised bids it wants Air Canada to consider: one that sees it invest $650-million for a 27% stake and another that gives Cerberus 11.9% of the airline for $250-million, as well as a guarantee to backstop a $850-million rights offering. The airline, however, has refused to consider the reworked deals, saying doing so would violate terms of the Li agreement. Instead, it has opted to get court approval of Mr. Li's deal. In court documents filed this week by Air Canada, it was revealed Cerberus told the airline it failed to produce its best offer during the final stages of the bidding process and was willing to be more "flexible" in producing a new bid. Details of an early Cerberus offer -- which valued Air Canada at $2.25-billion -- indicate the hedge fund was willing to invest $500-million in Air Canada for a 22.2% economic interest, and underwrite a $500-million rights offering. The fund said its investment structure complied with federal laws governing foreign ownership of airlines, limited to 25%. It also said Cerberus expected Air Canada to work with it in persuading regulators to boost the limit. Sources indicate Air Canada's directors were uncomfortable with Cerberus's proposed ownership structure, saying it would likely fail a "gut check" test with regulators. Moreover, the structure is said to have copied heavily from the Canadian Airlines model, which saw American Airlines hold a 33% economic control but a 25% voting interest in the distressed carrier. But American was able to install its own personnel in key positions, giving the U.S. carrier de facto control. "[The regulators] are not going to let that happen again," said an insider familiar with airline regulation. "They were not happy with what happened at Canadian Airlines." Mr. Li's bid was endorsed in part because he holds Canadian citizenship, making his bid cleaner. One of the people the fund is looking to for guidance on foreign ownership is Mr. Mulroney, the former Tory prime minister. He is the senior legal advisor to Cerberus, but is to become Air Canada's chairman of the board if the fund is successful in its bid for the airline. He was listed as one of four directors Cerberus planned to appoint to a revamped, 12-member board. Another key element of the Cerberus plan was to split up the company and sell off prized subsidiaries six to 18 months after the deal closed. It identified Aeroplan, Jazz, and the aircraft maintenance and cargo handling units as items to be put up for sale. "Each of these businesses presents significant organic or third-party growth opportunities and/or are capable of being monetized through a capital market transaction," the offer said. Earlier this year, Onex Corp. and Air Canada reached a deal on Aeroplan, which would have seen the buyout firm acquire 35% of the frequent-flyer plan for $235-million. That deal, however, fell through after the airline filed for creditor protection. But a potential sticking point in the initial Cerberus offer was a requirement that regional jets be operated by pilots from the regional carrier, Jazz. Those pilots earn less money than their mainline counterparts and would result in significant costs savings, hence increasing potential profits for Cerberus. However, this would likely spark labour fury with the Air Canada Pilots Association, the union that represents mainline pilots. Air Canada was almost forced into liquidation last May when the airline and the union were at odds over a new collective agreement on this very issue. A deal, struck at the last minute, was reached but only after the union agreed to allow an arbitrator to decide which set of pilots could fly the regional jets. Also contained in the initial offer document was a request by Cerberus for a $15-million "commitment" fee for closing the deal. Mr. Li's agreement calls for a similar kind of payment, only he is scheduled to get $6.5-million. pvieira@nationalpost.com Link to comment Share on other sites More sharing options...
Guest Starman Posted November 28, 2003 Share Posted November 28, 2003 More evidence that the deal with Victor Li is a better deal for the employees and stakeholders of Air Canada in the future. Even if it is a bit TOO good for two employees in particular... Link to comment Share on other sites More sharing options...
Guest neo Posted November 28, 2003 Share Posted November 28, 2003 Cerberus wouldn't even agree to hold their shares for 18 months!...Sell off assets: Aeroplan, Jazz, Maintenance... I tell you one thing: Cerberus was planning to execute their stated modus operandi down to the last piece of office furniture. They are a vulture fund, they're one of the best in the business at it, and they take no prisoners. Complain about Mr. Li's stock bonus if you like, but thank your lucky stars that his bid won. neo P.S. Brian Mulroney for Chairman of the Board? Jesus, Mary and Joseph! We must run and warn the others... Link to comment Share on other sites More sharing options...
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