Air Canada IPO Takes Flight

[Kip Powick]

Air Canada IPO takes flight

Parent ACE selling minority stake for up to $600 million

Priced at $21 per share, long-anticipated IPO well received

ACE Aviation Holdings Inc. plans to spin off a quarter of Canada's biggest airline for $525 million as it puts Air Canada shares on the stock market again.

Montreal-based ACE announced yesterday that Air Canada's new shares will be priced at $21 each.

That's in the upper end of the $19 to $22 range Air Canada's parent company expected to set as the offer price.

Some of the money will be used to beef up Air Canada's fleet, as the airline adds more international flights to such countries as India and China.

A total of 25 million shares will initially be sold in the offering, and there will be an aggregate of 100 million Air Canada class A variable voting shares and class B voting shares issued and outstanding.

At $21 per share, that values Air Canada at $2.1 billion, compared to Calgary-based WestJet Airlines Ltd.'s market value of $1.77 billion.

Air Canada will sell about 9.5 million shares for proceeds of $200 million, while ACE will sell about 15.5 million shares for an additional $325 million.

In regulatory documents filed earlier this week, ACE said it expected to sell $200 million worth of shares itself with Air Canada selling $200 million more.

But the initial public offering has proven popular.

"I think the IPO will be fairly well received by Canadians," said Rick Erickson, a Calgary-based airline consultant at RP Erickson & Associates.

The offering is scheduled to close at the end of next week. If it sells out, the underwriters — led by RBC Capital Markets, Citigroup Global Markets Canada Inc. and TD Securities Inc. — can sell an extra 3.75 million shares, or 15 per cent of the total.

That would bring total proceeds from the offering to more than $600 million.

ACE will keep control of Air Canada after the IPO because it will still own a 75 per cent stake — which will drop to 71.25 per cent if the underwriters sell the extra shares.

Once the offering is done, Air Canada expects to have cash and cash equivalents of $2 billion. The airline will also have a $400 million line of credit.

RBC, Citigroup, TD and seven other banks involved in the sale could share fees of as much as $31.7 million from the sale.

Air Canada's is the largest IPO of a North American carrier in three years, and exceeds the $271.6 million raised by Pinnacle Airlines Corp., a Northwest Airlines, affiliate, in late 2003.

The Air Canada offering is part of a restructuring of ACE, which has already sold minority stakes in its Aeroplan customer-rewards program and the regional carrier Jazz.

Jazz, Aeroplan and Air Canada Technical Services are to remain subsidiaries of ACE, which will buy the preferred shares of ACTS from Air Canada for $672 million, the company has said in regulatory filings.

Air Canada's cargo and ground handling businesses will become subsidiaries of Air Canada, which will also scoop up 51 per cent of Air Canada Vacations. "What we're seeing out of Air Canada is exactly what they announced," Erickson said.

"This IPO is breaking out Air Canada from underneath ACE to increase shareholder value."

[Kip Powick]

Air Canada offering takes wing

Globe and Mail Update

Air Canada stock has turned out to be a hot seller as U.S. institutional investors flock to get a piece of the action at $21 a share, prompting underwriters to boost the size of the offering by 31 per cent to $525-million for now, with high demand likely to drive extra sales.

Originally, the underwriters targeted selling $400-million in Air Canada shares, according to an eight-page confidential information memorandum.

The issue is three times oversubscribed, an industry source said Thursday, and if an overallotment option is exercised, there could be up to $603.75-million in stock sales, meaning that 28.75 per cent of Air Canada could be in the public float.

Air Canada's parent company, ACE Aviation Holdings Inc., will retain majority control of the country's largest airline. ACE will own a 75-per-cent stake initially, after issuing 25 million shares at $21 each. Factoring in the overallotment, ACE would be left with a 71.25-per-cent interest in Air Canada, which will start with a market capitalization of $2.1-billion.

On Thursday, ACE confirmed that there will be gross proceeds of $200-million from the initial public offering to Air Canada and $325-million to ACE from the secondary issue, not counting the 15-per-cent overallotment.

[Thebean]

Whats the ticker?

[dagger]

Whats the ticker?

$19.70 now

The Americans bought out much of the issue.

Over 6 million shares traded

[E-HANDLE]

Whats the ticker?

AC.A and AC.B

[Ex 9A Guy]

Not the anticipated rise usual for an oversubscribed IPO.

AC IPO

[mrlupin]

Scotia Mcleod is basically telling its investors (regarding ACE shares) to " trade on potential ACE Pop" because Air Canada IPO is overpriced. A "Pop" of up to 9$ is seen as possible by them.

"investors would have to be willing to pay a 25% valuation premium against a 5.5x forward EV/EBITDAR multiple, despite the fact Air Canada, unlike its global legacy carrier counterparts,does not have an embedded,cash generating loyalty program.This is important to the extent loyalty programs have been employed by the airlines as a mean of reinforcing liquidity in difficult operating environments and are therefore key to mitigating risk.This also ignores Air Canada's 1.4 billion pension deficit"

[Guest Kilo Mike]

Oh come on now .... We're unlocking shareholder value ( read Milton and Cerberus )

-said with tongue firmly planted in cheek-

[mrlupin]

How does Cerberus win in all of this if Ace shares take a plunge? Is ACE going to attempt to distribute some of the remaining AC shares to Ace shareholders like they want to do with Aeroplan? How are the ACE shareholders benefiting from this?

This is quite confusing. Maybe you can clarify Dagger?

Éric

[dagger]

How does Cerberus win in all of this if Ace shares take a plunge? Is ACE going to attempt to distribute some of the remaining AC shares to Ace shareholders like they want to do with Aeroplan? How are the ACE shareholders benefiting from this?

This is quite confusing. Maybe you can clarify Dagger?

Éric

Not every move is meant to immediately benefit shareholders. This float raises new capital for AC and ACE to pay for planes or whatever, and that is good for both AC and ACE. Now, if AC stock goes up, ACE stock will go up, too. I doubt AC's market cap is adequately reflected in ACE, so I don't see quite the same downside risk.

[wizard]

Can somebody tell me if I was to by Air Canada shares what one should I buy AC.A or AC.B and why?

Thanks

[dagger]

Can somebody tell me if I was to by Air Canada shares what one should I buy AC.A or AC.B and why?

Thanks

If you were to buy, you would probably want the Class B voting shares. The Class A are variable voting shares which if memory serves is what the Americans get because of foreign ownership laws. It will be interesting to see how the market reacts next week. The shares sold for $21, were down to $18.50 or so early this afternoon, and then bargain hunteres moved in and the A shares closed at $19.75. You could see more selling Monday AM, and more bargaining hunting in the afternoon. Crude is the big if right now. Almost broke through $55 this morning before recovering a bit.

[wizard]

Thanks again.

[dagger]

Thanks again.

I wouldn't chase the shares above $20 myself. Not until there is more clarity on crude for the next six months. There is enormous contradictory information on crude prices right now, but if we're in for an El Nino winter, that is bearish - bullish for airlines. I wasn't buying AC at $21. The employees can get a break with the company's contribution to an ESOP. For me, the interesting range would be $16-19, on the low end if WTI spot crude rebounds above $60, at the high end if it breaks south of $55, and above the range if it breaks $53. I don't quite share the more pessimistic analyses I've seen since AC probably lost about $50 million in pre-tax profit in the last quarter because of the security scare in London and the dispute with Sabre which has apparently ended on AC terms. I know of one other cost cutting measue coming (no adverse impact on employees), just an ending supplier contract - that will be beneficial to 2007 earnings.

Here's some of the comments from the analysts I'm referring to:

Air Canada Declines in First Day of Trading After IPO (Update2)

By Frederic Tomesco

Nov. 17 (Bloomberg) -- Air Canada shares dropped 6 percent in their first day of trading after the country's biggest airline raised C$200 million ($174 million) in the largest initial public offering by a North American carrier in three years.

Air Canada's Class A shares fell C$1.25 to C$19.75 at the 4:18 p.m. close of Toronto Stock Exchange trading today, after earlier falling to C$18.45. The Class B shares dropped C$1.42 to C$19.58. More than 11 million Class A shares traded.

Montreal-based Air Canada yesterday sold 9.52 million shares at C$21 each. In a secondary sale of Air Canada stock at the same price, Air Canada parent ACE Aviation Holdings Inc. raised C$325 million, bringing total proceeds to C$525 million.

``The Air Canada valuation is very aggressive,'' James David, an analyst with Scotia Capital in Montreal, wrote in a note to clients today. The valuation ``is untenable over the medium term,'' said David, who has a ``sector underperform'' rating on ACE Aviation.

Pricing for the share sale ``suggests that investors buying the IPO are either willing to pay a 25 percent current valuation premium for Air Canada'' or that they are confident the carrier can increase pretax earnings next year by 32 percent, David wrote. ``We are not comfortable with either of these scenarios.''

The Air Canada sale was the largest IPO of a North American carrier since Pinnacle Airlines Corp., a commuter carrier for Northwest Airlines Corp., raised $271.6 million in November 2003. Air Canada plans to use the proceeds to renew its fleet.

Foreign investors are restricted to owning the A shares, while Canadians can buy the B shares.

Tops Expectations

The carrier raised more money than it had planned. Air Canada had expected to sell shares within a range of C$19 to C$22 each, for total proceeds of about C$400 million, according to sale documents. The sale values the airline at C$2.1 billion, topping the C$1.79 billion market value for rival WestJet Airlines Ltd. of Calgary. The shares trade under the symbol AC.

Robert Milton, the chief executive officer of ACE Aviation, has sold parts of three operating units because he said their value wasn't reflected in ACE's stock price. ACE has already sold minority stakes in its Aeroplan customer-rewards program and the Jazz regional carrier.

Air Canada will use part of the proceeds from the IPO to pay for new Boeing Co. 777 and 787 jets as the airline adds more international flights to countries including India and China.

[Mitch Cronin]

Can somebody tell me if I was to by Air Canada shares what one should I buy AC.A or AC.B and why?

Thanks

..... if you wuz to buy Air Canada shares, y'oughta take yerself straight to the HolyCrapAmIEverFuddledUpNow Clinic. Do not pass Go, do not collect $200....

...right now....

off you go!....

[dagger]

..... if you wuz to buy Air Canada shares, y'oughta take yerself straight to the HolyCrapAmIEverFuddledUpNow Clinic. Do not pass Go, do not collect $200....

...right now....

off you go!....

I bet you said the same in September 2004

That's why you drink Appleton instead of the best single malt and aren't smoking Montecristo Double Coronas...

That's dagger's first rule of investing: No cajones, no Coronas

[LongTimer V]

Only Dagger would suggest investing in Airline stock,you probably bought NorTel

[Mitch Cronin]

No thanks. I don't smoke. .... (I love it!)

Cajones?... Is that what it would take to make a bundle betting these shares are headed for 12 bucks or less?

BTW... I'll take Appletons over any single malt, any day, any time... just a personal preference.

[dagger]

Only Dagger would suggest investing in Airline stock,you probably bought NorTel

Nope, no NorTel. But definitely Cargojet.

[Dork]

I thought ACE had shares to buy after CCAA to provide cash to AC for new planes....where has that money gone?

[dagger]

I thought ACE had shares to buy after CCAA to provide cash to AC for new planes....where has that money gone?

Still there. Money going on every new aircraft. Progress payments have been made on 777s. That's why AC has $2 billion in cash now and ACE has over a $1 billion.

[Dork]

Sounds good.So the $3 billion of the money is going to the aircraft. Now we are raising close to another $200 million for the aircraft purchace.

Where will the $ 2 billion payout to shareholders coming from ACE/AC? I would like have a better understanding of the overall ACE /AC financing concept.

[Homerun]

ACE's $1 billion won't be going toward aircraft for AC.

[mrlupin]

Sounds good.So the $3 billion of the money is going to the aircraft. Now we are raising close to another $200 million for the aircraft purchace.

Where will the $ 2 billion payout to shareholders coming from ACE/AC? I would like have a better understanding of the overall ACE /AC financing concept.

I'm sure Dagger will correct me if I am wrong.... but from my understanding, The 2 billion dollar distribution to investors is in the form of Aeroplan income trust units. ACE Aviation still owns the majority of the Aeroplan income trust. The "up to" 2 billion dollar distribution is the approx value of the distribution if all remaining shares of Aeroplan are distributed to ACE shareholders. No money would actually change hands in such a case....

Even the 1.787 Billion dollars in CASH that ACE had at the third quarter results is a deceptive figure. They do have that money but it is also balanced by 0.811 billion charge in the liabilities section. What that means is that almost 50% of the cash ACE has, is from advance ticket sales. ACE has yet to provide the service to those customers.(that's why you can't count it as profit money and it's balanced by the charge in the liabilities section.For accounting purposes, you can't account for a profit until you have rendered the service). The cash values being brought forward in the forum make it seem as if AC/ACE have tons of money, (2 billion here, 1 billion there) but the liabilities attached to that money.

[Dork]

Many thanks for the comments on the accounting. Still wondering where the $2 Billion is coming for the distribution...did you mean to say that the money doesn't exist?

Just a regular guy here trying to figure out a few things.