Post by
lb1temporary on Apr 05, 2021 11:45am
TD: Target at 3,75$ (Reduce)
Transat Looks for Alternatives as AC Deal is Cancelled
Event
On April 2, Transat A.T. and Air Canada announced that they are terminating the Arrangement Agreement for the acquisition of Transat A.T. by Air Canada. The decision was made due to the European Commission advising that it would not approve the transaction with the current concessions offered.
Impact: NEGATIVE
We are moving Transat A.T. to REDUCE from Tender due to the elimination of the formal acquisition offer. Our EPS forecast changes reflect our updated assumption regarding $250 million in government financial assistance (associated interest expense) in F2021. We have raised our risk rating to SPECULATIVE from High to reflect the wide range of outcomes we envision. We are updating our target price to be based on the weighted-average probability of three potential scenarios for Transat A.T. (Exhibit 2):
1. 50% probability of an agreement being formalized with another buyer at $5.00 per share, including potentially Mr. Pierre Karl Peladeau's investment company as per the indication in Transat's April 2 press release.
2. 25% probability of no other buyers coming forward, Transat receiving government or other financial assistance, and Transat's share price reflecting our risk-adjusted DCF estimate of $2.73/share.
3. 25% probability of no other buyers coming forward and Transat's share price reflecting nil equity value. Although we believe that our new target methodology is the most prudent approach at this time, we believe that the uncertainty in our 12-month estimate for the share price is unusually high. In our view, traditional EPS and EBITDA-based multiples are not relevant or possible at this time due to the excessive debt (including operating leases) in the capital structure and negative earnings. We believe that Transat's short-term share-price movement will be particularly challenging to estimate based on a lack of analyzable financial factors, and that estimating the long-term fundamentals of the company will provide limited value.
TD Investment Conclusion
Although we believe that Transat A.T. remains a strong brand for international leisure travel for Canadians, we believe that the catastrophic impact of the pandemic, Transat's liquidity requirements, the tenuous state of the recovery, and the elimination of a formal takeover offer for the company justify a REDUCE recommendation.