NEW YORK, Oct. 13 /PRNewswire/ -- On October 13th Sandell sent the
following letter to the Board of Directors of Transat A.T. Inc.:
October 13, 2005
Board of Directors of Transat A.T. Inc.
c/o Mr. Jean-Marc Eustache
Transat A.T. Inc.
Place du Parc
300 Leo-Pariseau Street, Suite 600
Montreal, QC H2X 4C2
Mr. Jean-Marc Eustache
Chairman of the Board and Chief Executive Officer
Sandell Asset Management Corp. ("Sandell") and the private investment
funds advised by Sandell (collectively with Sandell, the "Sandell Funds")
beneficially own 1,311,200 Class A shares of Transat A.T. Inc. ("Transat" or
the "Company"), representing approximately 3.2% of Transat's total outstanding
As Transat's October 19 Board meeting draws near, we feel that it is
critically important for us as a large shareholder of the Company to express
our position concerning various decisions that you will be asked to make with
regards to Transat's capital structure. We strongly believe that if these
decisions are not addressed in the right way they have the potential to
prejudice us and other shareholders.
In our view, at yesterday's closing price of $17.80, Transat's shares are
at a level that is extremely dislocated from the true value of the Company.
We say this with conviction based not on subjective valuation multiples or
hypothetical transformational assumptions about the Company -- rather, one
only needs to look at Transat's staggering $366 million cash balance (which
excludes $132 million of cash held in trust) which represents $8.82 a share or
half the current share price. Furthermore, taking into account the fact that
Transat's cash balance continued growing over the last few quarters despite
the Company being caught off guard by the rampant rise in fuel costs this
Spring/Summer, and also considering that management expects to continue
generating strong cash flow in the future, it is easy to see why the cash
balance is oftentimes referred to as a cash hoard instead.
We have listened to management's general ideas for the use of some of the
cash which includes the need for working capital and a "rainy day" buffer, as
well as for potential acquisition(s). We do not disagree with some aspects of
this business rationale, but we are concerned about the potentially large
disconnect between the amount of cash that management may want to set aside
and the amount it truly needs to be able to run a disciplined and efficient
business. Through a share buyback, we believe Transat can easily return $290
million of excess cash already on hand to shareholders and still be able to
comfortably achieve its various goals. This will still leave the Company with
a significant cash balance of $75 million which management had repeatedly
maintained and reiterated during our meeting on September 21 was sufficient
for working capital requirements. While management also stated that there are
no acquisitions in the near term, even if there is an accretive and sound
acquisition to be made the Company still has the option of obtaining financing
at current low interest rates or using stock as acquisition currency.
Finally, the figures above also do not take into account the release of the
current $132 million of trust cash as they are earned, or the strength of
Transat's EBITDA generation which is expected to be in excess of $125 million
We appreciate the need to invest in various opportunities, which is why we
strongly advocate you invest the excess cash in one of the premier and most
undervalued service companies in North America today - Transat A.T. Inc. As a
major shareholder, we strongly urge you, the Board, to immediately unlock
significant shareholder value through a meaningful self-tender offer via a
The valuation rationale behind a self-tender at this point in time is very
simple -- Transat's massive cash balance is masking the value of its
operations, and vice versa. $290 million of excess cash is the equivalent of
$7.00 per share. Based on yesterday's closing price of $17.80, it directly
implies a $10.80 valuation for Transat's operations. On adjusted 2006 EPS of
$1.58(1), the current operations are therefore valued only at a shockingly low
6.8x 2006 P/E. Comparable travel service companies trade in a range of 12x-
15x. In fact, Transat's operations should be accorded a multiple at least at
the high end of that range given the strength of the Company's market position
and earnings power. While Transat's outright return on equity was a very
respectable 15% over the last four difficult quarters, if you were to exclude
$290 million of excess cash, the normalized ROE is estimated to be closer to
We are therefore currently at an especially opportune time for the Company
to repurchase its shares. A $290 million self-tender at $24.00 per share
(which is a 35% premium to the current stock price but a substantial discount
to a conservative intrinsic valuation of Transat) would not only reduce
Transat's outstanding shares by 29%, it would also be immediately accretive to
2006 EPS by 31% (based on 41.5 million fully diluted shares currently
Even more attractive, is that post-tender, using a very conservative 13.5x
2006 target P/E multiple on pro forma EPS of $2.23 would result in a share
valuation of $30.10, or an upside of 69% from yesterday's closing price.
At this critical juncture, clear steps to fix the overcapitalized balance
sheet will be a big step by the Board towards ensuring that shareholder value
is maximized. As you must agree, undertaking a meaningful share repurchase in
this case can hardly be considered controversial as it simply releases value
that is already there in the form the excess cash. A meaningful share
repurchase would also convey a very powerful message to the equity markets
about the Board's and management's confidence and discipline in the underlying
operations. Conversely, failure to enact a decisive and meaningful return of
excess cash to shareholders may send a misleading and negative signal to
investors that the Company wants to have a large pool of readily available
cash to potentially spend itself out of challenges. Such situations always
leave management teams vulnerable to the temptation to squander shareholders'
cash on non-value enhancing moves and may provide further pressure on the
The position laid out in this letter is completely compatible with
management's operational and strategic goals. In fact, a leaner yet still
flexible capital structure provides us with greater confidence that management
will actually do a better job without the moral hazard associated with a hefty
cash cushion. Based on exploratory informal conversations, we are confident
the vast majority of Transat shareholders would be highly supportive of our
significant value-creating share repurchase proposal. Recall that another
very large shareholder, citing a support base totaling approximately 40% of
shares outstanding (excluding the Sandell Funds' stake), made a similar
request nearly a year ago(2). It is imperative that the Board finally
recognize the demands of the Company's owners and stop paying mere lip service
to shareholders or subject us to further delays and excuses.
As a long-term investor in Transat, we want to remind the Board that your
fiduciary duty is to the Company and shareholders, not management. If this
responsibility is too heavy to bear, then the Board should either (i) also
consider putting Transat up for sale so that you no longer have to serve the
current shareholder constituency, or (ii) be prepared to step aside for new
Directors to assume those duties. If the Board is unwilling to take
appropriate actions we reserve the option to pursue alternative methods to
enhance value. Given the constitution of Transat's long-ignored shareholder
base, we are confident that there is strong appetite for change.
As always, please feel free to contact us to discuss these matters at your
Thank you for your consideration.
Very truly yours,
SANDELL ASSET MANAGEMENT CORP.
/s/ Thomas Sandell
Chief Executive Officer
(1) Adjusted from 2006 expected EPS of $1.70 to reflect reduced interest
income from the $290 million of excess cash.
(2) "Jana Partners LLC Requests Transat A.T. Inc Undertake a Dutch
Auction Tender Offer", public press release dated November 11, 2004.
SOURCE Sandell Asset Management Corp.