MONTREAL - Air Canada's depressed share price might put it in play for privatization or partnership with a U.S. carrier, the airline's parent company, ACE Aviation Holdings Inc. said Friday.
CEO Robert Milton said the holding company has been approached by private equity and pension funds and has had talks with American carriers despite laws that limit the foreign ownership of Canadian airlines.
"There has been dialogue with the U.S. space looking to change,'' he said in a conference call to discuss the holding company's fourth-quarter and annual results.
"I don't think it's inconceivable that Air Canada could be part of it and it would make a lot of sense for a U.S. airline to look to Air Canada.''
A number of U.S. airline companies, such as Delta and Northwest, have been considering mergers to cut costs and deal with the slump in their business because of the looming U.S. recession.
ACE, which owns 75 per cent of Air Canada, has been looking for ways to cash out its stake in the Montreal-based airline. It had hoped to wind up it operations by the second quarter of 2008 by offloading its remaining stakes in Aeroplan Income Fund, Jazz Income Fund, service company ACTS and Air Canada.
However, deteriorating global prices for airlines and a credit crunch that has made it harder for companies to borrow money could affect that timing and how it proceeds, Milton told analysts.
"Given the tremendous downward movement we've seen in airline equities the world over, we want to be as aggressive as we can sensibly be to benefit our shareholders, but we've got to keep in mind the realities that are going on around us.''
Milton didn't identify which players are interested in the airline, but he said ACE hasn't met with the federal government to discuss raising the 25 per cent foreign ownership limit.
"I think that there's plenty of money in Canada,'' he said.
Air Canada's A and B shares have a combined market value of more than $2 billion on the Toronto Stock Exchange.
In addition to foreign ownership restrictions, airlines must have a majority of Canadians on their boards. That means any private equity group would have to come from Canada, but could include big U.S. investors or an operating airline as well.
For example, the deal to take Bell Canada parent BCE private for more than $52 billion including debt involves majority control by the Ontario Teachers pension fund, with financing help from two big U.S. private equity investors.
Among players that have previously expressed interest in Air Canada is Toronto-based private equity player Onex Corp., which offered $5.7 billion in 1999 to take over and merge Air Canada with now-defunct Canadian Airlines.
It's not surprising that private equity investors would be circling around Canada's largest airline, given its depressed trading price, said Jacques Kavafian of Research Capital Corp.
"The stock price does not reflect the value that it could generate as a private company,'' he said in an interview.
"Maybe it's better to take this thing private, run it for a couple of years and then come back to the market.''
While Milton's statements suggest he's not closing any doors, Kavafian said he doesn't see a U.S. airline partnership materializing, given the ownership restrictions in both countries.
"I don't really see that happening.''
The holding company, created in the 2004 bankruptcy restructuring of Air Canada, has been spinning off stakes in its subsidiaries while buying back its own stock.
Last year it returned $2 billion of capital to shareholders by distributing units of Aeroplan and Jazz. It also sold a majority stake in its maintenance division ACTS but has held off parting with its Air Canada stake.
Milton said ACE would prefer to sell its stake in Air Canada rather than repurchase the 25 per cent stake it doesn't own.
"Given the current Air Canada share price, we continue to explore all options to maximize value for our shareholders.''
Air Canada is one of the world's cheapest investments and the stock price doesn't accurately reflect its intrinsic value, Milton added.
"The airline has done precisely what management said it would do when that airline was IPO'd. The unfortunate thing, obviously, is we have seen a very significant compression of valuations for airlines and Air Canada has been caught in that and that's just the reality we deal with.''
Overall, the holding company reported a jump in 2007 net income to $1.4 billion for 2007 on gains related to the spinoff of its maintenance division as well as rights offerings.
The earnings amounted to $11.44 per diluted share and compared to $408 million or $3.80 per share a year earlier.
On the Toronto Stock Exchange, ACE's A shares were up 99 cents or 4.45 per cent to $23.25 in trading Friday morning. Air Canada's A shares gained 24 cents or 2.48 per cent to $9.90.
