Some of Canada's largest pension funds are among those kicking tires at Air Canada and looking to replace Hong Kong businessman Victor Li as the airline's would-be rescue investor.
The airline's top executives are scrambling to find an alternative investor after Mr. Li announced Friday he will likely abandon his deal because Air Canada has not met anticipated financial forecasts and because the airline's unions have refused key changes to their pension plans.
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- Unions seek active role
But sources say that if that deal can't be saved, other investors may be prepared to fill the gap, including the airline's creditors, Cerberus Capital Management LP, and some of the country's largest pension funds.
Sources say there have been preliminary talks between the Caisse de dépôt et placement du Québec, the Ontario Municipal Employees Retirement Board and the Ontario Teachers Pension Plan Board about putting in a joint bid for the airline, should Mr. Li abandon his plans.
"There's a high level of interest among Canadian pension funds for a made-in-Canada solution to this thing ....." according to a source.
"They won't come to the forefront until [Mr. Li's] clock has run out. They would want Li to be out of the way before they show any real interest."
Mr. Li's deal — through which his Trinity Time Investments Ltd. would have bought about one-third of the airline for $650-million — is set to expire on April 30.
On Thursday night, he advised Robert Milton, the airline's chief executive officer, that he would not extend that date and was unlikely to complete his deal.
Since then the airline's top executives, directors and unions have held a flurry of meetings about how to respond to the latest crisis in the restructuring that began on April 1, 2003.
Air Canada's board was scheduled to meet last night — the latest in a series of daily meetings.
And the airline's unions met yesterday morning and vowed to take a more active role in efforts to rescue the insolvent airline.
By lining up an alternate investor, Air Canada would be able to steer clear of liquidation — and the loss of 30,000 jobs.
The three pension funds were among the many potential investors worldwide that the company and its advisers contacted last year when the search for an equity investor began, according to a person close to Air Canada.
However, OMERS and Teachers dropped out after a preliminary look, while the Caisse de dépôt, stayed in only a little longer and was not in the final round of 10, the source said.
"We definitely have heard that there are pension funds that are interested in being involved," one union official said yesterday.
The source added that OMERS, Teachers and the Caisse de dépôt are among the pension funds interested in obtaining a stage in the troubled carrier.
Buzz Hargrove, president of the Canadian Auto Workers union, said the union is talking to a "number of interested parties" about investing in Air Canada, but would not confirm or deny that those pension funds were among them.
OMERS president Paul Haggis could not be reached. His counterpart at Teachers would not comment. A Caisse spokeswoman said the giant Quebec pension fund does not comment on "rumours or possible transactions."
One source familiar with the discussions said any bid from the funds would likely be contingent on changes to the pension plans along the lines of those that Trinity was demanding.
According to the source, it is expected that a new investor could have more luck in getting concessions from the airline's unions — possibly through a change in senior management.
Mr. Milton and his chief restructuring officer Calin Rovinescu drew ire from the airline's employees because they stood to receive millions of dollars worth of stock through their tentative deal with Mr. Li, while rank and file employees gave up hundreds of millions of dollars in concessions.
Mr. Milton and Mr. Rovinescu obtained those concessions on the condition that pensions not be touched, so unions are loath to agree to new concessions from the same bosses.
"There's a sense that the concessions that the main unions were unable to give Victor Li ..... that somebody else would be successful in getting," the source said.
One barrier to the Teachers investment is that the fund is a major investor in Calgary-based WestJet Airlines Ltd., Canada's second-largest carrier.
But it is believed that the pension funds would look to shrink and carve up Air Canada — selling off assets such as its regional carrier Jazz and its frequent-flier program Aeroplan — which could make it logical for Teachers to invest in both WestJet and Air Canada. Some investors believe that if Air Canada shrinks, all Canadian airlines will benefit.
"Teachers would be beneficiaries by having a foot in both doors," said a source.
Aside from the pension funds, it is possible that some or all of Air Canada's creditors could step forward to fill the gap left by Trinity. Topping the list are Deutsche Bank AG or GE Capital, which have worked closely with the airline's top executives.
"Clearly, Deutsche Bank and GE Capital are already partners in this restructuring and therefore figure prominently in where things go forward," a source close to Air Canada said yesterday. "But they have not provided any commitments about a greater stake, and we haven't sought any [such] commitments."
It is also possible that bondholders could redouble their efforts to provide capital through a rights offering involving all creditors. A rights offering would give everyone owed money by Air Canada a chance to buy new shares in the airline at a discount price — possibly with the involvement of Cerberus, which came second to Trinity in the equity solicitation process last spring.
Sources said Friday that Cerberus would be interested in taking another run, but only at a much reduced price.
Other sources said there is little appetite for another run at Air Canada at Toronto-based Onex Corp., which made a joint proposal last year with Texas Pacific Group (TPG) of Fort Worth, Tex.
One source close to Air Canada said the top priority for the airline's board and management now is to establish the process for selecting which investors will replace Trinity. There could be a power struggle between Air Canada's management and its unions and creditors over who will control the search for an alternative investor.
A report dated Friday from Air Canada's court-appointed monitor recommends that the airline be given more time to find an alternate source of cash, but suggests that the monitor work with Air Canada and its advisers "in consultation with the applicants' stakeholders" to determine the process.
The report recommends that Air Canada's court protection from creditors be extended for a "sufficiently long" period, although no specific date is cited. The monitor notes that the airline has $957.2-million in cash on hand as it enters the strong summer period.
One source close to the restructuring said the next equity solicitation process would have less management control than last time.
"It will be a process run by the court, but it will have a lot more involvement from creditors," the source said.
When Trinity was selected over Cerberus in January, Air Canada's unions and creditors complained that they had little say in the process through which Trinity was chosen.
