By David Knibb in Seattle
No takeover has been mooted, but ACE chairman Robert Milton is worried about that prospect because he believes ACE shares are substantially undervalued. Given the known value of ACE assets that have been partially floated and the likely value of other assets, not counting Air Canada, they total C$3.9 billion ($3.5 billion). That also happens to be the market capitalisation of ACE. As Milton observes: “If you look at the ACE share price, you get the airline for free.”
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| “If you look at the ACE share price, you get the airline for free” |
Analysts agree that floating Air Canada would force the market to recognise its value. Their own estimates of that value vary from C$1.2 billion to C$2.3 billion. One theory on why investors do not recognise that value is that other assets, such as Air Canada Technical Services, are overvalued, thus masking Air Canada’s real worth. Another is that investors have little appetite for airlines because of the unrelenting pressures of high fuel prices and low-cost rivals.
A more general theory is that units within the holding company are not fully valued until they are sold separately. Some call this “the holding-company discount”. What ACE intends to do about it is unclear. Milton suggests it would be easier to float Air Canada than other ACE assets, which are in varying stages of readiness for a sale.
The most likely option is for ACE to offer a minority stake in Air Canada similar to what it did with loyalty programme AeroPlan and regional carrier Jazz. The airline probably cannot qualify as an income trust, an investment vehicle that proved popular in the AeroPlan and Jazz floats, but a sale of common shares would still give the market a chance to value the airline. ■
Source: Airline Business
