Onex Drops its Merger Bid
As quickly as it all began - in that flurry of sweeping statements, grand gestures, complicated attacks and even more incomprehensible counterattacks - it was suddenly all over. The 10-week tussle for control of Canada's two largest airlines ended abruptly last Friday afternoon, with a Quebec Superior Court ruling that Gerry Schwartz's Onex Corp. would be violating the law if AIR CANADA shareholders allowed it to take possession of more than 10 per cent of the Montreal-based carrier in order to merge it with rival CANADIAN AIRLINES INTERNATIONAL LTD. of Calgary. Within the hour, Schwartz had pulled out, and Air Canada chief executive officer Robert Milton was congratulating his company's executives, shareholders and employees. Milton managed to make it sound as though their victory was attributable more to managerial brilliance than to good lawyers or good luck.
So what happens next? Are we back where we started? Has this whole "unfortunate" process, as Boston-born Milton likes to call Air Canada's brief brush with shareholder democracy, accomplished anything for the people who own, work for or fly on the nation's two major carriers?
That's hard to tell. For now, it appears that Air Canada employees and management and its Star Alliance marketing organization, led by UAL Corp., parent of United Airlines, and Deutsche Lufthansa AG, have emerged as the clear victors. Air Canada shareholders gain on the roundabouts (a $16-a-share buyback for 36.4 per cent of their stock, a deal that is largely financed with $730 million from UAL and Lufthansa), but lose something on the swings (the only substantial capital appreciation they have seen since shares of Air Canada were sold to the public in 1988, gains that were destined to start evaporating this week).
The bridesmaids, Schwartz and Toronto-based Onex, come out bruised. They have a higher profile and an estimated $50 million in buyback money to show for their pains and expenses, but they don't have what Schwartz really wanted, which was to finally show the world that his $11-billion buyout company could close the big deal.
The losers are the employees, shareholders and creditors of Canadian, which faces death or dismemberment unless AMR Corp. of Fort Worth, Tex. - the parent of American Airlines and Canadian's largest shareholder - is willing to keep bailing it out. (In its offer, Air Canada proposes to buy Canadian for $92 million, take over some foreign routes and turn its rival into a discount carrier.) Also on the loser list: Canadian Auto Workers union president Buzz Hargrove, whose decision to back Onex enraged the CAW's Air Canada members who, ominously, began raising funds for decertification.
The economic implication for airline passengers is another issue. If it accomplished nothing else, the Onex campaign sounded the death knell for Ottawa's two-airline policy under which the federal government acted as a referee to make sure Air Canada and Canadian both survived, competed and divvied up national and international business. Those days are over. Now, everybody, from federal Transport Minister David Collenette on down, talks about Air Canada as if it already has a monopoly. The only question, according to one of the dozens of investment bankers who worked on the airline deals, is who will ultimately end up running the show - "the same old idiots or a new bunch of idiots."
He had been betting that shareholders would pick the new guys, Onex and its partner AMR. But they ran up against Air Canada's 10-per-cent ownership law. That provision was put in place by the Mulroney Conservative government in 1988, not as a defence against foreign ownership - as is now widely assumed to be the case - but to protect the newly privatized Air Canada from potential corporate raiders and to prevent a large shareholder from moving the airline's headquarters out of Montreal. Onex thought it could circumvent the 10-per-cent stricture by electing a new board of directors and temporarily converting Air Canada common shares to a new class of stock with reduced voting rights. Onex argued that no one would actually control the airline until Parliament got around to lifting the 10-per-cent rule.
Not so, Air Canada replied. The device would still be illegal, because for some brief period of time - "a minute or an hour or a day," as an Air Canada lawyer put it - more than 10 per cent of the voting shares would belong to Onex and its associates.
The court agreed - albeit reluctantly, according to Quebec Superior Court Justice André Wery. "This intervention is not an attempt to mingle in corporate affairs which normally are better dealt with in the boardrooms of Canadian corporations," he wrote. "Rather, it aims at making sure for the protection of the shareholders that Airco's (Onex's) offer is handled within the confines of existing laws."
Any notions that Schwartz, 57, a Winnipeg native who now lives in Toronto, would stay in for another round, were dispelled by the speed with which he conceded the fight. Only hours before Wery's decision, Onex announced it would sweeten its bid by $100 million, for a total of $2.2 billion or $17.50 per Air Canada share. After the ruling, Schwartz quickly killed a much-anticipated vote on Onex's offer by Air Canada shareholders. "We will respect that decision," he said, "and accordingly have instructed counsel that our offers and our resolutions at next Monday's shareholders' meeting be immediately withdrawn."
There was speculation that Ottawa might clear the way for Onex to make another bid by quickly amending the Air Canada Public Participation Act of 1988. Don't count on it. Collenette was willing to talk about changing the 10-per-cent rule as long as Onex and Air Canada's institutional shareholders were willing to lead the way and take the flak. But once the court ruled and Onex threw in the towel, Collenette stopped sounding like a minister who was anxious to make transportation history and started talking vaguely about how he would work with Air Canada to ensure that the soon-to-be "dominant carrier" acted in the public interest.
In addition, Schwartz and his team are known, and even admired, for walking away from takeover targets when the risks outweigh the anticipated rewards. This happened in 1995, when Onex sought to buy and reorganize the beer and entertainment conglomerate John Labatt Ltd. Management fought back then, too. Schwartz walked away. Clearly, being forced to admit defeat in the airline battle is an even deeper disappointment. In September, Schwartz told Maclean's that if this deal failed, "I'd take it terribly personally. It would hurt. But we'll dust ourselves off and we'll come back." People who know him agree - it's not Gerry Schwartz's style to linger on the sidelines. They expect he will return to the hunt - if not for Air Canada, for some other, large, corporate quarry.
Maclean's November 15, 1999