Transat shareholders deserved a vote in the federal government's bailout

Globe and Mail

15-07-2025

Pierre Karl Péladeau deserved better when he tried to buy airline Transat A.T. Inc TRZ-T.
We can debate whether the telecom and media billionaire and former Parti Québécois leader would be a good pilot at the debt-heavy carrier. But like a lot of people, I've learned to never underestimate PKP.
There's no debate shareholders in Montreal-based Transat deserved an opportunity to vote on a restructuring that froze out Mr. Péladeau, one of the company's largest investors, and instead increased the federal government's stake in the airline. The recapitalization of Transat that closed on July 10 used loopholes in pandemic-era legislation to ride roughshod over basic shareholder rights.
This month's reworking of Transat's finances has its roots in worst days of the COVID-19 pandemic, when the company tapped a federal loan program, the Large Enterprise Emergency Funding Facility or LEEFF. Rival Westjet Airlines never took government money, while Air Canada paid back their loans.
At the start of this summer, Transat still owed $772-million under the federal loan program. Repaying the loan and other debt weighed heavy on the airline's stock price. Transat shares traded at $1.65 in early June, just before the recapitalization announcement.
Mr. Péladeau, who owns 9 per cent of Transat through family holding company Financière Outremont, offered to buy the company numerous times, including an offer of $2.64 per share. Quebecor Inc.'s chief executive officer, an experienced hand at negotiating with government, clearly saw an opportunity to snap up the airline, then work with Ottawa to fix the balance sheet. He hired investment bank Canaccord Genuity Group Inc. to advise on the bid.
Instead of falling into Mr. Péladeau arms, Transat and LEEFF's operator – the Canada Enterprise Emergency Funding Corp. or CEEFC – announced a sweeping recapitalization on June 4. The federal agency forgave almost half the money owed to taxpayers, cutting the LEEFF loan to $334-million and reducing the interest rate.
In return, CEEFC received convertible preferred shares in Transat representing a 19.9-per-cent stake in the airline. 'CEEFC has worked closely with Transat to ensure it meets its obligations under the LEEFF program while supporting the company's continued commercial viability in a competitive market,' said Elizabeth Wademan, chief executive officer of CEEFC parent company Canada Development Investment Corp, in a June press release.
Contra Guys: We'll wait till we see clearer skies for this airline
The federal government also owns warrants in Transat that date back to the original LEEFF loan in 2021. Add the warrants to the preferred shares and the federal government has a 32.6-per-cent stake in Transat on a fully diluted basis. A stake that size effectively blocks a hostile Transat takeover.
In late June, Mr. Péladeau went to the Quebec Superior Court, asking Transat to hold a shareholder vote on a transaction that he alleged transferred control of the airline to the federal government. He didn't ask to overturn the deal with CEEFC. He simply asked the owners be allowed to approve a recapitalization that massively diluted their stakes.
Mr. Péladeau lost the court fight.
Transat successfully argued it relied on exemptions to regulations protecting the rights of minority shareholders, which are loopholes reflecting pandemic financing rules.
The airline also won court support for its argument that CEEFC cannot control the company. As part of the restructuring, CEEFC pledged it would cap its exercise of warrants and preferred shares so the federal government never owns more than 19.9 per cent of Transat's common shares at any time.
In any normal transaction, shareholders get a vote on a debt-for-equity swap that sees a creditor get 19.9 per cent of their company, and an overall interest that amounts to nearly a third of the company. The company and the courts denied Transat shareholders this basic right.
Would Transat's owners have spurned the CEEFC proposal for a takeover offer from Mr. Péladeau? That's now an academic question.
The CEEFC refinancing failed to fix all that ails the airline. 'Transat no longer faces a potential liquidity issue,' said analyst Konark Gupta at Scotiabank in a recent report. 'That said, its absolute debt levels relative to its EBITDA profile, even after this refinancing, makes for a volatile equity.'
In Quebec, where business battles frequently have political overtones, the federal government is now playing a kingmaker at a flagship airline co-founded by Premier François Legault. The courts denied Transat shareholders a voice in the transaction that created this situation. If Transat hits turbulence, Mr. Péladeau has every right to remind investors who could have been the pilot.