Winnipeg's Exchange Industrial Income Fund (EIIF) has agreed to pay $59 million for Calm Air and will continue to operate all three airlines as distinct brands.
The three air carriers dominate scheduled air service in northern Manitoba and eastern Nunavut, carrying more than 300,000 passengers a year. When combined, EIIF's aviation business will generate about $140 million in annual revenue, ranking it among the top half-dozen aviation companies in Canada.
Mike Pyle, CEO of EIIF, said his company has long viewed Calm Air as an attractive target, but it was not for sale until now.
"This is a company with a proven market niche and demonstrated long-term sustainability," Pyle said. "Notwithstanding it's the worst equity market in my lifetime, it was a deal that needed to be done now."
EIIF will have to raise about $25 million in a public offering to close the deal, the largest acquisition EIIF has ever done.
But Pyle and Kevin Hooke of Wellington West, the lead agent in the syndicate, said they are confident they will be able to raise the funds on the public market.
"We see this as a recession-resilient deal that is complementary to its current holdings," Hooke said.
He said it will be profitable to EIIF right away without factoring in any potential cost savings.
But Pyle stressed that this was not a typical acquisition where costs are chopped out to make the deal profitable.
No job losses are being contemplated -- all three airlines are currently hiring -- and both Pyle and Gary Beaurivage, president of Calm Air, said there was little service overlap.
"I feel very good about this deal," Beaurivage said. "The opportunities in the future are good for the entire aviation group that Exchange Industrial controls."
Calm Air was founded 45 years ago by Arnold Morberg, who died three years ago. The company continued to be owned and run by Morberg's widow, Gail Morberg. About 10 per cent of the purchase price will be paid in EIIF units and the rest in cash.
In 2007, Calm Air generated about $70 million in revenue and about $13 million in earnings before interest, taxes, depreciation and amortization (EBITDA). Beaurivage said 2008 numbers will come in close to those levels, despite the fact there has been a marked drop-off in business from mining exploration companies in Nunavut.
When one company dominates a market, there are usually concerns about price-gouging, a particularly sensitive issue when there are 23 remote First Nations in northern Manitoba that rely on air travel from these airlines.
Rob Evans, grand chief of the Assembly of Manitoba Chiefs, said, "It costs me much more to travel in the North than it does to travel east-west."
But he said there is a history of adequate air service from those airlines.
One of EIIF's largest shareholders is Tribal Councils Investment Group, an investment fund owned by the seven tribal councils of Manitoba.
Allan McLeod, CEO of TCIG, said its stake in Exchange Industrial contributes to the fund's ability to make substantial cash returns to the communities that those airlines fly into.
"Instead of just being customers, it is good for First Nations people to be owners as well," McLeod said.
Barry Prentice, a transportation expert at the Asper School of Business at the University of Manitoba, said there is always a trade-off in a thin market between rates and the volume of business and competition.
"But it is expensive to operate in such a market and you have to be good to survive," he said.
Calm Air and Exchange Industrial Income Fund
15 -- number of planes in the Calm Air fleet including six Saab 340Bs, four ATR 42-300s, two Cessna Grand Caravans and three Hawker Siddeley 748s
33 -- number of planes in Perimeter's fleet, including 19 Fairchild Metro II's
9 -- number of planes in Keewatin Air's fleet (operates as Kivalliq Air), including three Beechcraft 1900s and six King Air 200s
450 -- number of Calm Air employees primarily based in Thompson, Winnipeg, Churchill and Rankin
500 -- number of employees at Perimeter Aviation and Keewatin Air in Winnipeg and throughout northern Manitoba
1,500 -- total number of employees at EIIF companies that also include Jasper Tank of Spruce Grove, Alta., Water Blast Manufacturing and distribution of Calgary and Stainless Fabrication Inc. of Springfield Mo.
$240 million -- annualized revenue of EIIF after the close of the Calm Air deal