What's in it for Onex CEO? Ego and assets
Gerry Schwartz excels in situations such as Air Canada's
Thirty minutes into his explanation of why Air Canada lost $428-million last year, chief executive Robert Milton said something that, for a moment, made listeners believe the earth had stopped on its axis and begun rotating in the other direction.
It was generous praise for his former enemy, Gerry Schwartz, the Onex Corp. chairman and CEO who tried and failed to take over Air Canada in 1999. Back then, Mr. Milton accused him of "stealing" his airline. Last week, Air Canada agreed to sell 35% of its Aeroplan division to Onex, and here's what Mr. Milton said yesterday:
"I love the Aeroplan-Onex transaction because implied in that [is] you've got an investor like Gerry Schwartz, with the successes he's had on going into companies and taking divisions of those companies and creating tremendous value. The way I see it, we still own 65% of a company that he's going to drive tremendous value creation in."
No one had the brass to ask Mr. Milton: If he thinks Gerry Schwartz is such a brilliant businessman, why didn't he let him buy Air Canada four years ago? But never mind. If the Onex chief still covets a piece of the Canadian airline business, he will get his chance soon enough. There is reason to believe Onex could be a player -- and an owner -- in Air Canada's restructured future.
The Aeroplan deal gave Onex a minority stake in Aeroplan, the country's most popular loyalty program, for $245-million. He also has the right to buy more if Air Canada decides to sell.
Clearly, Aeroplan gives Mr. Schwartz an interest in Air Canada's survival.
The airline needs money, though. Some analysts believe the airline will run out of cash by the end of 2003, unless it can wring large concessions from its unionized employees and get big prices for the assets it is selling. Both are unlikely, and at this point it's hard to imagine the airline being allowed to tap the public markets.
But guess whose bank account is bursting?
Onex had almost $1.4-billion in cash on hand as of September, and if it ever completes the initial public offering of its Loews Cineplex theatre chain, it will have even more.
In a country where the government has decided only Canadians should be allowed to own airlines, Onex is one of the few cash-rich domestic players with a fascination for -- and now, a large stake in -- the airline business.
Would it be interested? "We really won't comment on stuff we may or may not look at," said Nigel Wright, managing director at Onex.
Mr. Schwartz has said little about the takeover battle since it ended. In October, 2001, weeks after the terrorist attacks that crippled the airline business, he remarked: "I can actually say our failure to buy Air Canada -- and it was a failure -- was the luckiest thing that ever happened to us."
It was true at the time. But he didn't say the airline would never again be considered worthy of Onex's attention. Mr. Schwartz has made a career of buying companies no one else loves, which fairly describes Air Canada today.
The airline's market capitalization, at little more than $300-million, is about the cost of a single new Boeing 747. Its share price is less than half of its IPO value from 15 years ago. Its debt trades at yields that resemble bonds issued by a South American banana republic.
These are the kinds of situations in which Onex usually excels. But there would be other motivations, too, for Mr. Schwartz to help lift Air Canada from its woes. It would give him the brand-name asset he covets, and the prestige that simply doesn't come with owning sugar factories and auto-parts manufacturers.
And there is the ego factor. In 1999, Mr. Schwartz was willing to spend $2.2-billion to take over Canadian Airlines Corp. and Air Canada and merge them. Not good enough, said Mr. Milton, and he bought Canadian.
Since then, Air Canada's shareholders' equity has gone from $725-million to negative $1.9-billion. It's not entirely Mr. Milton's fault, but it is his legacy. And it would be hard to argue that Gerry Schwartz would do worse.