Pending tax law changes have led Air Canada parent ACE Aviation Holdings to delay the sell-off of a minority stake in regional carrier Jazz.
ACE had prepared to offer the stake via an income trust, the same investment vehicle it used for its successful sale in June of a minority stake in AeroPlan, Air Canada’s loyalty plan. Income trusts have become popular with Canadian companies because of pass-through provisions that avoid corporate taxes.
But Canada’s finance minister in mid-September signalled a likely change in the income trust rule because of tax revenue losses, after which tax officials stopped giving advance rulings on such offerings. The Jazz proposal did not require an advance ruling, but ACE nonetheless chose to delay until the government decides whether to change the tax rule on income trusts and the market stabilises.
Analysts generally concur with ACE’s decision. Postponing the sale will not hurt ACE’s cash position: it is in the unusual and enviable state of sitting on a C$2.5 billion ($2.1 billion) cash reserve and may ask shareholders to approve a special distribution of up to C$300 million.
Clive Beddoe, chief executive at rival WestJet, questions Air Canada’s strategy of turning subsidiaries into self-standing entities so it can sell minority stakes. “If you sell off your maintenance operation, for example, you’ll have to pay someone else at least 15-20 points margin,” Beddoe claims. “Where you did it at your costs before, you’re now going to pay more.” He adds: “Air Canada has a lot of cash at the moment but they also have an unfunded pension liability of a billion dollars. So their cash position isn’t nearly as solid as it might otherwise appear.”
ACE raised C$250 million by selling 14.4% of AeroPlan, putting a C$1.7 billion value on the loyalty plan. ACE has not said how large a stake it might offer in Jazz, but analysts have valued the regional carrier at around C$1.4 billion. Meanwhile, ACE and US Airways have signed a deal that could assign some of the US carrier’s network to Jazz.
DAVID KNIBB/SEATTLE
Source: Airline Business
