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Gold/Mining/Energy : Air Canada is taking off? -- Ignore unavailable to you. Want to Upgrade?

To: Jay who wrote (995)	11/16/1999 3:07:00 PM
From: D.M.	Read Replies (1) \| Respond to of 1033

Here's some more information on the AC share buyback plan you may want to go over. AIR CANADA ("AC-TMVYW;ACNAF-Q") - RE: Letko Brosseau & Associates Judges Air Canada Issue - of Debentures the Caisse de Depot Totally Inappropriate - and Unfair to Present Shareholders Letko Brosseau & Associates, a Montreal based investment manager with over $2.4 billion in assets and holding over 7 million Air Canada shares for its clients, expressed the view that the proposed debenture to be issued by Air Canada in favour of the Caisse de Depot, and possibly others, falls well short of fair treatment of Air Canada's shareholders and has the potential of being highly detrimental to their economic interests as the following analysis will demonstrate. Air Canada has spent the last several months fending off an unsolicited take-over offer on the basis that it was protecting the value of the company for its shareholders. Air Canada has stated that it has also substantially improved the value of the company through much effort and negotiation with its business partners. Just the improvement in value has been quantified at over $500 million. It is inappropriate for Air Canada then to take these benefits and convey them to a single shareholder. The issuance of this debenture on these terms puts a value of approximately $885 million on all of Air Canada. This value is less than half what management has argued the company was worth and is less than what ONEX was prepared to pay. On November 11, 1999, Air Canada announced it's intent to issue a convertible debenture to the Caisse de Depot in an amount of $150 million and possibly an additional $150 million to others for a total potential issuance of $300 million. The debenture will be convertible into Air Canada shares at a 20 % premium to the January 2000 market price of Air Canada shares and will bear interest at 7.25 %. Assuming the debentures are converted after 4 years, the time at which Air Canada can force conversion, the debenture holders will have received $87 million in interest, reducing their cost of $300 million to approximately $213 million. This $213 million does not take into account the significant additional option value implicit in a convertible instrument. Air Canada will repurchase, at the end of November this year, 36 % of its shares at a price of $16.00 per share. After this repurchase, there will be approximately 120 million common and class A shares then outstanding. On the repurchase, assuming all present shareholders tender to the repurchase, each shareholder will receive the equivalent of $5.85 per share and retain his proportionate interest in Air Canada. Air Canada shares are currently trading at approximately $10.00 per share. Adjusting for the $5.85 cash receipt and the reduced number of shares outstanding, the current implied market price of Air Canada is approximately $6.50 per share after the repurchase. If the price of Air Canada shares are at the same level a month and a half from now, the conversion price for the debenture will be set at a 20 % premium to $6.50 or $7.85 per share. This will entitle the Caisse de Depot and other debenture holders to receive 38 million shares ($300 million divided by $7.85 per share). Added to the 120 million shares of Air Canada issued after the buy back, Air Canada would then have 158 million shares issued, with the debenture holders having acquired their 38 million shares, or 24 % of the company, for $213 million. As stated above, this puts a value of $885 million on all of Air Canada. This value is less than half what management has argued the company was worth and is less than what ONEX was prepared to pay. Air Canada may argue that the conversion price of the shares, to be set a month and a half from now, will be more than double what the current market is prepared to pay. We do not consider it proper for the company to speculate on what its shares may be trading at a month or two away, particularly given the consequences of an error in their assessment of what the market price may be and the massive number of shares Air Canada may issue to a small group of shareholders on preferential terms. We are strongly opposed to the issuance of this debenture, even in a reduced amount of $150 million, and consider it an unacceptable appropriation of Air Canada's value for the benefit of a single shareholder. We cannot see how the securities commission and the board of directors of Air Canada can approve the issuance of these shares given that they are potentially highly dilutive and represent such a large proportion of the company. Although we understand that the Caisse de Depot acts in its own self interest, it is surprising that it would show such poor market leadership in this case. Had the Caisse not benefited from this transaction, it can be assumed that it would not have been happy to see some other shareholder take advantage of such a deal. The right thing to do would be either not issue the debenture or allow all shareholders to participate in the issue of the debenture in proportion to their holdings in Air Canada. The Caisse should have no objections to this. Our obligations towards our clients have required us to point out the unfairness and the inappropriateness of the Air Canada debenture issue. TEL: (514) 499-1200 Letko Brosseau & Associates Peter Letko Daniel Brosseau Doug