ACE Aviation to Sell Stake in Jazz Regional Airline (Update1) (Bloomberg.com)

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Nov. 28 (Bloomberg) -- ACE Aviation Holdings Inc., Air Canada's parent company, revived plans to sell a stake in its Jazz regional airline as an income trust after the federal government opted last week not to tax the high-yield securities.

http://us.rd.yahoo.com/dailynews/rss/searc...id=a1iV0Jiu45tY

 

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Ace Aviation to spin off Jazz as income trust: Deal could raise $150M
National Post
(Tue 29 Nov 2005 - Page: FP5 - Section: Financial Post) Byline: Chris Sorensen and Carrie Tait

Air Canada's parent ACE Aviation Holdings Inc. is moving forward with a plan to spin off its regional airline Jazz as an income trust after temporarily shelving the deal in September because of uncertainty surrounding Ottawa's plans for the sector.

Analysts are predicting the deal will raise roughly $150-million based on a valuation of Jazz at $1-billion and assumptions that ACE will follow the template that it created earlier this year with the partial spinoff of its Aeroplan loyalty program as an income trust. That deal saw ACE sell off 14% of the subsidiary, raising $287-million.

But while Jazz is set to become the first major trust IPO to hit the market after Finance Minister Ralph Goodale said he wasn't planning to tax the high-yield securities, some investors say the offering should not be viewed as a "bellwether" in determining whether the demand for income trusts has returned in a big way.

"It's kind of a tricky one because it's in an industry that is not typically associated with the word 'stable,' " said Doug MacDonald, vice-president of investments at KBSH Capital Management, although he noted ACE has taken several steps to mitigate risks for trust-hungry investors.

"It's pretty clear that this is quite a bit different than a traditional airline model."

ACE took great pains in its preliminary prospectus, filed yesterday, to point out that Jazz's unique agreement with Air Canada -- in which Air Canada buys seats on the regional carrier -- effectively insulates Jazz from most of the volatility typically associated with the airline business. The holding company said 99% of Jazz's $907-million in revenue during the 12 months ended Sept. 30 was derived from its capacity purchase agreement (CPA) with Air Canada. Operating income for the period was $115-million.

"The CPA protects Jazz's earnings from many of the day-to-day business risks of scheduled air service, such as passenger load factor, flight cancellations due to weather, increases in fuel costs, navigation, landing and terminal fees, and certain other costs," according to the documents.

Jazz has been a key component of Air Canada's post-restructuring business plan because of its lower cost structure. The plan calls for Air Canada to focus on higher-margin international routes while Jazz, with a growing fleet of regional jets, handles a greater share of domestic traffic. The prospectus states that Jazz's growth plan includes a focus on point-to-point flying, bypassing expensive hubs like Toronto's Pearson International Airport. It also calls for building a high-frequency "mass transit" schedule between large Canadian markets and then expanding the concept to smaller centres. As well, Jazz's smaller jets will be used to develop new cross-border markets.

Analysts are also expecting ACE to move forward with a spinoff of its maintenance arm, Air Canada Technical Services (ACTS), which is poised to reap $1.5-billion in new maintenance contracts that are expected to flow from ACE's recent investment in US Airways.
"They've got to get this thing done first," said Horst Hueniken, an analyst at Westwind Partners, referring to the Jazz spinoff. "With ACTS, you are arguably better off waiting a little bit until the business matures a bit and they can get a bit higher valuation."