It was the deal that came out of nowhere, as private equity firm Onex Corp swooped down on Monday with a $5-billion offer to buy WestJet Airlines (WestJet Airlines Stock Quote, Chart TSX:WJA), a purchase which would see Onex pay $31.00 per share for WJA.
And while WestJet shareholders are surely pleased with the 67 per cent premium, one has to ask whether Onex CEO Gerry Schwartz is out of his mind for getting into the always turbulent airline industry. No worries there, says Lyle Stein of Vestcap Investment Management, who thinks that if anyone knows good value when he sees it, it’s Schwartz.
“First of all, Gerry Schwartz knows the numbers probably better than anybody. The question is, did he overpay? I think he saw something that the rest of the world was missing,” said Stein, senior portfolio manager and managing director for Vestcap Investment, to BNN Bloomberg on Wednesday.
The friendly deal will see Onex pay $3.5 billion plus debt to total $5 billion for WestJet, with indications that much will stay the same concerning the airline and its business plan. CEO Ed Sims will remain at the helm, while the profit-sharing program WestJet has with its employees will also stay. WestJet shareholders will vote on the deal in July.
Onex has a history with the airline sector. In 1999, the firm tried to take over Canadian Airlines and then in the early 2000s it formed US parts company Spirit AeroSystems. But the deal has raised eyebrows, nonetheless, primarily due to the capricious nature of the business. Airlines are notoriously prone to externalities, including labour issues and, most prominently, the fluctuating price of oil.
But Stein says that to Schwartz, the deal must have looked too good to pass up.
“Nobody wants to own a domestic airline stock and this was very undervalued compared to its American peers and Schwartz put in a comparable value to American peers. It shows you what happens in a market when suddenly there’s a brand new buy and then the stock goes,” says Stein.
After climbing above the $30.00 mark in 2014, WestJet’s share price dropped to the mid-$20.00 range for a number of years before dropping to the low-$20.00 range for subsequent years. Before the new deal was announced, WJA closed last Friday at $18.52.
Stein says that while Canada’s Competition Bureau will be looking it over, the deal is likely to pass, arguing that even if WestJet ends up pulling runs out of less populated parts of the country, the void will likely be filled by someone else.
“I think [the deal] will go through,” Stein says. “It’s a domestic player making a sound investment in a Canadian company. I don’t see any reason quash it.”
“Airlines come and go and I think what we’ve all learned over the last forty years is that it doesn’t take much to start an airline. And if there’s a market that need service, someone will fly that route, and it doesn’t necessarily have to be one of the big brand-name carriers,” he says.