So we finally have some details about Victor Li’s (winning) bankruptcy bid for Air Canada, as well as on Cerberus Capital’s (losing) bid. You wouldn’t know, having looked at the details of the respective offers, that Cerberus’s was the loser and Li, son of Chinese billionaire Li Ka-Shing, was the winner.
The nugget that is getting reported most is that Air Canada creditors will get 25.7 cents on the dollar under Victor Li’s latest proposal, as opposed to 25.1 cents on the dollar under Cerberus’s offer. That is awfully close stuff, but, all else being equal, it does tilt gently to Victor Li.
The trouble is, all else isn’t equal. There are three nasty assumptions underlying Li’s offer, and violate any of them and Cerberus’s bid is a winner:
- The Li bid assumes a post-bankruptcy equity valuation for Air Canada of $5-billion. If it is less than that, then Cerberus’s bid, which relies less on equity and more on cash, comes out ahead. So if you think that full-service airlines are going to be highly valued in future, go with Li. And if you really think that, then you haven’t been reading the news.
- Under Victor Li’s original offer, GE Capital was to get a 9.56% stake in the restructured Air Canada. Under his revised offer, Li is offering to buy out GE’s stake and make it available to the unsecured creditors. Fair enough, that makes more equity available to creditors, but creditors could have cut their own deal with GE without Li’s intervention. In other words, there is a collossal assumption here: Li’s deal implicitly assumes that no-one but Li could have cut a deal with GE, which is simply untrue.
- As part of the winning Li offer, Deutsche Bank is leading a C$450 million rights offering. Under that offer, creditors can buy additional Air Canada shares at a discounted rate. But again, there is no reason Cerberus couldn’t have done someone similar, and as a matter of fact it had proposed to do that. Li just stole some thunder in this bizarre-o auction process whereby Li got to see Cerberus’s last offer and respond, but Cerberus didn’t have the same right.
Lurking under all of this, of course, is that Li holds a Canadian passport, and Cerberus is a U.S. company. Under expensive and discredited Canadian foreign ownership rules, Li gets a leg-up enabling him to circumvent the 25% ownership ceiling that otherwise hobbles Cerberus (and any other would-have-been bidders).
As I wrote in a National Post column this week, the only thing that this Li win guarantees is that Air Canada will exit bankruptcy within six months — and re-enter it within six years. And that will be long after, of course, Victor Li has sold his shares and left.