dagger Posted November 12, 2004 Share Posted November 12, 2004 This shows you that even in good times, the natives can get restless. Here is Transat, spinning off cash, facing a shareholder revolt. Is this what we can expect at AC with Cerberus? Jana Partners LLC Requests Transat A.T. Inc. Undertake a Dutch Auction Tender Offer (sharebuyback) NEW YORK, Nov. 11 /PRNewswire/ -- On November 10th, the following letter was sent by Jana Partners LLC to Transat A.T. Inc.: Board of Directors of Transat A.T. Inc C/O Mr. Jean-Marc Eustache Transat A.T. Inc. Place du Parc 300 Leo-Pariseau Street, Suite 600 Montreal, QC H2X 4C2 Dear Mr. Eustache: As you are aware, JANA Partners LLC ("JANA") owns 2,660,000 shares of Transat A.T. Inc. ("Transat" or the "Company") representing approximately 8% of the outstanding stock. We would like to be supportive of management as we believe that you have done an admirable job in restructuring the business; however, we are obliged to publicly articulate our divergent views regarding the Company's capitalization plans and management's perception of shareholder sentiment. Specifically, we believe that it is in the Company's best interest to undertake a Dutch auction tender offer for at least $200 million of its outstanding stock immediately. This would allow the company to take advantage of the current under-valuation (in our view) of its stock. While we acknowledge that a process currently is underway to assess strategic options, we believe that your January deadline is simply too late; in addition, the indicated buyback range of $100-150 million, which you mentioned to us, if you were to execute a Dutch auction tender offer, is simply too low. First, we do not understand why it takes so long to study the buyback issue. We first raised the topic of a Dutch auction tender offer with you in June 2004 -- we also know that other shareholders have been pushing you on the subject over the subsequent months. In fact, you have had excess cash building on the balance sheet long before that date. Since June 2004, the stock price has climbed from $18 to $24. Your hesitance has made a buyback 33% more expensive. We are concerned that you have little appreciation for the time value of money. Are you aware that by sitting on $370 million of cash for eight months as opposed to buying back your own stock at a 20% free cash flow yield, you have lost close to $50 million? This begs the question: Why are you engaging an investment banking firm to assess your alternatives now? Why was this not done a year ago? With respect to shareholder sentiment, we have undertaken an informal poll of several of your shareholders. While we are confident that a formal referendum on the topic would yield a vastly greater amount, you will be interested to know that, including our own shares, approximately 13 million shares (40 % of outstanding shares) support our views. This total includes a significant percentage of both Canadian and U.S. shareholders.(1) While we are well aware that there are some shareholders who would disagree with us, we are more confident that with a little more effort, we could total substantially greater than 50% support for our views. As we have discussed with you, the economics of a Dutch auction tender offer are compelling. To review, the math and logic: the Company has a cash balance of approximately $370 million. Assuming that you retain $75 million as a cushion for unforeseen circumstances (which you have advised us and others is a sufficient reserve and is consistent with the cash drawdown following 9/11), the Company will still have roughly $295 million left for other activities. Our buyback analysis shows that a repurchase of $200 million of stock at $25, will be immediately accretive by $0.33 per share, or 20%, over the latest twelve months earnings and will permanently reduce the Company's float by roughly 8.0 million shares. An investment in the Company's stock involves less risk than any other acquisition since you obviously know your own company intimately. It involves no execution risk, no integration risk, and significantly lower transaction fees. It is unlikely for the Company to generate as attractive a return on investment through any acquisition as is achievable via a share repurchase. Transat currently trades at 4.7x EBITDAR and at approximately a 16% free cash flow yield. We believe it would be difficult to find a competitor willing to sell at a similarly attractive valuation. As you have acknowledged, acquisitions should be benchmarked against the return on investment generated by the repurchase of shares. This notwithstanding, a Dutch auction of this magnitude would leave the Company with a cash position of approximately $95 million (in addition to the $75 million cushion mentioned above) as well as annual free cash flow in excess of $100 million. This provides ample liquidity to pursue accretive acquisitions, which, in general, we would support. Frankly, we do not even see the logic of maintaining $95 million of cash on the balance sheet (over the $75 million cash cushion) given the company's annual free cash flow. If you have an attractive acquisition to make, you would certainly be able to finance it. The fact is: the company is inefficiently capitalized. We believe that there is a great urgency regarding the Company's cash plan. We formally request that you undertake a Dutch auction tender offer for at least $200 million as soon as possible. In addition, since even following such a tender offer the Company will still have $170 million of cash on its balance sheet and will be generating roughly $100 million of annual free cash flow, we request that the Company implement a normal course issuer bid for an additional 10% of the public float over the year following the Dutch auction tender. Finally, we believe that, as one of your largest shareholders, we, along with other shareholders, should have the right to appoint a representative to the Company's Board of Directors to ensure that our collective views are considered. We are happy to discuss these matters at your convenience. We await your response. Thank you for your consideration. Sincerely, Barry Rosenstein Managing Partner JANA Partners LLC Contact: 415-989-7770 (1) We will not identify the institutions who favor this plan in this public letter, but we invite the company to discuss them privately with us. Link to comment Share on other sites More sharing options...
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