-AC + CP Air

Onex expected to raise airline offer WebPosted Wed Oct 27 10:42:19 1999 OTTAWA - One day after winning important regulatory concessions from Ottawa, the Onex Corporation is reported to be ready to improve its offer to buy Air Canada and merge it with Canadian Airlines. Collenette asks for input.Federal Transport Minister David Collenette dropped the Air Canada hot potato into the lap of the House of Commons Transport Committee yesterday, asking MPs to come up with suggestions on whether to boost the ownership cap on Air Canada voting stock beyond the current 10 per cent.

They'll have to move fast. Wednesday 27 October 1999 Onex claims big win Minister's move angers Air Canada JAN RAVENSBERGEN; JOAN BRYDEN

Tuesday, October 26, 1999

Marc Lalonde
National Post

On Nov. 8, Air Canada's shareholders will be asked to choose between a hostile takeover bid by Onex Corp. of Toronto and AMR Corp. of Fort Worth, Tex. (American Airlines' parent company), and a more recent proposal by Air Canada.

There are fundamental differences between these competing proposals -- for both shareholders and Canadians. And, while shareholders will understandably make their decision on the basis of economic self-interest, there are also broader issues at stake here -- issues the public has a right to consider and pronounce upon through their elected representatives in Parliament. Although my law firm acts for Air Canada, I have personal views that I wish to place on the public record.

David Collenette, the Transport Minister, has already identified "five principles" against which he will evaluate any restructuring of the airline industry.

These include:

1. consumers must be protected;
2. regional services are to be guaranteed;
3. employee rights and concerns are to be addressed;
4. industry competition is to be fostered; and
5. effective control must remain in Canadian hands.

These principles make good sense from a public policy perspective, but in my view the minister should have added a sixth principle to his list: namely, that Air Canada must remain widely held and that the existing statutory prohibition against any individual or group owning more than 10% of Air Canada's voting shares must remain unchanged.

In the context of the current debate, there are procedural and substantive aspects to this issue.

First, the procedural aspects. The Air Canada Public Participation Act, which was enacted by Parliament when Air Canada was privatized in 1988, includes two very important ownership restrictions: the aforementioned 10% rule, and a similar provision restricting total foreign ownership in the airline to 25%. This is the law of the land, and it should remain so at least until Parliament has debated the issue at length and has made a conscious decision to allow a single shareholder to control much of Canada's airline industry.

It is odd that a hostile takeover of the nation's major flag carrier would be launched on the assumption that existing legislation will be changed to accommodate that takeover. In all my years of public service, I have not witnessed a more disturbing challenge to the rights of parliamentarians.

Just last year, Canadians were immersed in a debate about the future of the country's banking industry in which four of the country's five major banks were criticized for assuming that two proposed mergers would be approved by the minister of finance. Can you imagine the outcry that would have followed had the banks assumed that Parliament would change the Bank Act to allow a single shareholder to control one of the resulting merged entities? Such arrogance would justifiably have been subject to public derision and disapprobation.

According to recent reports in the media, the minister of transport might open Pandora's box by hinting that he supports eliminating or increasing the Air Canada 10% rule. And, he appears ready to do this even before Air Canada's shareholders have voted on the Onex-AMR bid.

If the minister of transport does this he will rightly be criticized for appearing to favour the Onex proposal because only the Onex bid would require a change to the 10% rule. Moreover, this would be highly unfair to Air Canada, its shareholders and its employees -- all of whom have operated in a manner consistent with Air Canada's governing legislation.

In terms of substantive considerations, the purpose of the 10% rule is to prevent any one individual or group from controlling Air Canada and, in turn, exercising dominance over the nation's major flag carrier. I believe the policy justification of the rule remains sound, and that Parliament would be unwise to change it.

And, the argument in favour of the 10% rule is even more compelling in the case of Onex's proposed merger between Air Canada and Canadian Airlines because the resulting closely held airline would control approximately 80% of domestic air travel in Canada.

Ownership restrictions in strategically important industries are common in Canada and elsewhere, where governments have employed various instruments (some much less favourable to shareholder interests than the 10% rule) to ensure important privatized industries continue to serve the public interest.

When the government privatized Petro-Canada, the same 10/25 rule was adopted. A similar principle was used in the privatization of Eldorado Nuclear, although the percentages differ slightly. And, in the case of CN Rail, no individual shareholder can own more than 15% of the company. The Bank Act currently prohibits anyone from owning more than 10% of a bank, and ownership must remain in Canadian hands. The telecommunications and broadcasting industries are also subject to government-imposed foreign ownership restrictions.

If the government were to introduce amendments to Air Canada's 10% ownership rule, it would only be a matter of time before these other businesses would be subject to pre-emptive takeover bids or that they would demand similar treatment. In future, we could face a situation in which many of our most important industries -- air and rail transport, banking, etc. -- are controlled by single shareholders, much to the detriment of consumers, and Canada generally. I believe these industries should remain widely held. They should also remain truly Canadian controlled and be managed in Canada.

Finally, according to some trade experts, any change to the Air Canada 10% rule might also lead to a challenge under the North American Free Trade Agreement, which could, in turn, result in restrictions on foreign ownership of Air Canada being reduced dramatically, if not struck down. This would clearly undermine Mr. Collenette's fifth principle requiring control of the airline industry to remain in Canadian hands.

The debate over the future of Canada's airline industry raises important public policy considerations. Although Air Canada's shareholders must decide upon competing proposals as a first step, Parliament has a crucial role to play in shaping the future regulatory framework within which the industry will operate.

The 10% rule still makes good public policy sense and it should be preserved in the case of Air Canada and other companies that have similar restrictions. Reasonable people may disagree with me in terms of the substance of my argument, but surely procedural fairness dictates that any change should only occur after a thorough debate in Parliament and only after Air Canada shareholders have had an opportunity to vote on the Onex-AMR bid. In the meantime, the government should refrain from tipping its hand.

Marc Lalonde is a partner with the law firm Stikeman, Elliott in Montreal and is a former federal cabinet minister.

This reminds you of FIRA, "all we had to fear was FIRA it self", which put a top on what we could get for a company stock. If you can't sell your company why ... [DTN]

Onex Corp. (OCX $26.75) -J. McIlveen
Recommendation: 1-Strong Buy, Moderate Risk 1-Yr Target: $33.00 Onex held a conference call to discuss the proposed acquisition and merger of Air Canada and Canadian Airlines in transactions valued at C$5.7 billion. Under the proposal, the merged entity will retain the Air Canada name, maintain its headquarters in Montreal, and continue to have operations across Canada. The general analysts' view is that this is a good deal for Onex and Canadian Airlines, but not necessarily for Air Canada. It is our understanding that Onex would not proceed without combining the two airlines. The offer should be mailed to shareholders of Air Canada and Canadian Airlines within two weeks.

Schwartz also made it clear that Canadian's arch rival, Air Canada, has shown no interest in his proposal. He said he tried to arrange a meeting for Wednesday with Air Canada executives, but they declined.

Wednesday-Night #912 25 August 1999

Ottawa plans law to limit airline power
Monopoly carrier would face series of federal controls

SHAWN McCARTHY
Parliamentary Bureau
Tuesday, October 26, 1999

Ottawa -- Transport Minister David Collenette will propose new legislation to protect consumers and encourage competition in the airline industry during a high-profile appearance at a Commons committee today, sources say.

Mr. Collenette will use the committee appearance to stake out an aggressive role for Ottawa should one dominant carrier emerge from the restructuring of the Canadian airline industry, government sources said yesterday.

The proposed legislation would:

Seek undertakings from any dominant carrier not to raise prices -- and give those commitments the force of law.

Require that slots be left open at major airports, including Toronto's Pearson airport, for new regional carriers or charter airlines prepared to increase domestic services.

Ensure fair access for those new entrants to reservation systems and frequent flier plans.

Give the government clout to police this access to ensure there is no abuse of dominance.

The minister is not looking to full reregulation of fares and routes in Canada under a monopoly scenario, officials say, but would impose some form of price controls, as well as requirements that the airlines serve smaller communities.

Mr. Collenette is also set to signal that the government will consider raising its 10-per-cent limit on individual share ownership in Air Canada, if such a change is required to provide stability in the industry.

Air Canada president Robert Milton has said Mr. Collenette should remain silent on that 10-per-cent rule. He argued last week that any comment on it could be construed as federal endorsement of the Onex bid, which requires Ottawa to raise the limit to at least 33 per cent.

Sources said yesterday that Mr. Collenette will strive to appear neutral in the contest between Onex's $1.8-billion bid to buy and merge Air Canada and Canadian Airlines International and Air Canada's $800-million share-buyback plan.
Air Canada shareholders will vote on the offers Nov. 8.

Still, Air Canada and its partners, Lufthansa AG and UAL Corp., accuse Mr. Collenette of bias and their lawyers are examining whether the partners have legal recourse.

They argue the minister's suspension of the competition law in August was clearly aimed at giving Onex an opportunity to make a bid unhampered by legal restrictions.

"We're concerned that the government has changed the law once for Onex, and is set to do it again, and that suggests it is playing favorites," said one source close to UAL, the parent of United Airlines.

He said the partners are examining whether that apparent bias could give rise to legal action if Onex wins the bid for Air Canada.

Air Canada has challenged the legality of Onex's bid in Quebec Superior Court, arguing it contravenes the intent of the Air Canada Public Participation Act, which prevents a shareholder from owning more than 10 per cent of the airline.

Onex chairman Gerry Schwartz -- who met last night with Ontario MPs -- is still considering whether to sweeten his bid after Air Canada last week appeared to trump his original offer for the company's shares.

Mr. Schwartz is looking for signals from Mr. Collenette that the government will not block his deal over the 10-per-cent rule.

Mr. Collenette will also spell out the approval process the government will follow if and when a deal is approved by shareholders.

He is expected to indicate that the Competition Bureau would conduct a merger review, which could be expedited if the bureau is persuaded that Canadian Airlines would fail without a merger. In that case, the bureau would not oppose the merger on competition grounds.

At the same time, Mr. Collenette will insist that the government have the final word on any proposed deal in order to enforce his five principles of consumer protection, no price gouging, service to smaller communities, protection of employees and Canadian control.

The minister will also respond to a report from the Competition Bureau, which sources say concludes that the emergence of one dominant airline would create serious competition problems that Ottawa would have to address.

As a result, Mr. Collenette will promise new rules in the airline industry in the event of a merger or the failure of Canadian Airlines.

Sources said Mr. Collenette has persuaded his cabinet colleagues that he needs increased leverage to ensure consumers don't suffer from monopoly pricing and to encourage new entrants into market.

The Canadian Transportation Agency now has the power to roll back price increases if it finds a monopoly carrier is guilty of price gouging but the minister has argued that provision is too weak.

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Diana Thébaud

see 912

David and Diana Nicholson

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JAY BRYAN

NOT TOMORROW GERRY, I HAVE A HEADACHE, or can Air Canada fend off ONEX's suit?

The apparently simple dilemma of what to do about the falling star of Canadian Airlines [AC] and the lack of competition resulting from its disappearance from the market, has overtones that are economic, political and international as well as domestic and commercial.

This is not going to be a pleasant negotiation. We have seen over the past week confirmation of many of the objections raised last week around this table, with Star Alliance partners and the unions adding their vociferous opposition.

The first question is whether Section 47 should have been invoked. Air Canada [AC] insists that the issue is not an industry in distress, merely one airline in distress.

Gerry Schwartz

"The government is intervening, not simply interfering, not only in the death process, but also in the grieving process." Media reports indicate that Gerry Schwartz was less than candid about the timing of[OCX] ONEX's representations to Minister Collenette. As the week's news stories evolve, the strength of the political will has become increasingly obvious.

The Onex plan was a masterful stroke on the part of American Airlines, allowing it, if accepted, to gain control over Canadian air service.

Some of the opposition to the role of American Airlines/AMR in "NewAirCo" is nationalistic. However, this raises the question of what is the value of the Canadian flag on the tail of the plane? Are we willing to pay for that little thrill of pride when we see it on a tarmac in some remote country? more is based on analysis of what the AMR alliance has done to drain Canadian's resources over the past years.

The airline industry in the U.S. is actually highly regulated. Free enterprise, maybe, but not free trade (e.g. the total opposition to any suggestion of Fifth Freedom or cabotage rights for foreign airlines).

The problem is the confining effect of limiting foreign ownership. It would appear that without this limitation, both airlines could thrive. Unfortunately this is not a Canadian invention, but originated in the United States in 1931 with the issuing of radio licenses. The twenty-five percent maximum ownership rule favours the incumbent to the detriment of the smaller players. Viewed in this light, the Onex proposal appears reasonable.

JAY BRYAN

But, whatever the solution, it is certain that a single surviving national carrier is not good for Canadians, unless cabotage is permitted and embraced in North America and perhaps The Americas, following the example of the European Community. In Europe since 1993, traffic rights for traffic wholly within the EU/EEA have been virtually completely liberalized, with the effect that an EU/EEA licensed air carrier can fly any international route in the EU/EEA and any route within its own country. Since '97 an EU/EEA licensed carrier can also fly domestic routes in other EU/EEA countries (cabotage).

Parallels were inevitably drawn with the experience of Canadian banks - protection of the oligopoly from foreign competition has done nothing for the consumer. We should have allowed the bank mergers last year AND welcomed competition from foreign banks.

Diana Thébaud Nicholson

Notes by by Herb Bercovitz and Diana Thébaud Nicholson
Edited by Diana Thébaud Nicholson