Quick Pitch: Air Canada (AC:TO)

Tender Offer (Odd-Lot) — Free Option

Yet another odd-lot tender offer for a bit of ice-cream money. This setup is only actionable for accounts not subject to Canadian withholding tax.

Air Canada is repurchasing ~8% of its outstanding shares in a price range of C$18.50-C$21.00/share. Odd-lot holders (99 shares or fewer) will be accepted on a priority basis. Yesterday, the stock price slipped below below lower limit and closed at C$18.36/share. That has created an opportunity with an upside of C$14-C$261. One way to think about it is that you’re getting a free option on the tender getting priced above the lower limit or the shares rallying before the tender expiration (June 20).

The risks of the tender or odd-lot provision cancellation seem low. The conditions are fairly standard, and include major indexes not dropping more than 10% from May 13, as well as no “significant change” in AC’s share price since that date. There’s some risk, especially given the recent volatility in the markets, but tenders like this are rarely cancelled due to market swings.

I don’t have any high-conviction arguments for the tender being priced at higher levels. That’s why I mostly look at this setup as a free option. Nonetheless, there are a few positives worth noting:

• This is Air Canada’s first-ever tender offer (or “substantial issuer bid,” in Canadian terms).
• The company has been ramping up open market buybacks lately. It repurchased 6% of its shares in 2024, and then 4%+ in Q1 2025.
• Looking at a 5-year stock price chart, AC hit rock bottom earlier this year—just before the tender announcement—and remains near the lows even after the recent rebound.
• The valuation gap to peers has also widened recently. Air Canada is now by far the cheapest in the group, trading at 3.3x EBITDA, compared to 5.5x+ for other airlines.

• The company has recently released its financial targets for 2028, guiding to 54% adjusted EBITDA growth from 2024 to 2028. At current prices, the stock trades at just 2x 2028E EBITDA. The projected C$1.5bn in 2028 FCF implies a 4x free cash flow multiple.
• There are no major shareholders on the register, so it’s not like some large investor could just take up a significant portion of the tender.
• Management is not participating in the tender, although they own only a minimal amount of stock.

Despite all that, it’s not easy to make a strong case that the company is “obviously cheap” and that the tender price will easily skew toward the upper end of the range. There are two key reasons for that.

First, Air Canada is the most exposed public airline to U.S.–Canada travel. AC is the largest transborder operator, with transborder routes accounting for roughly 20% of revenues. With U.S.–Canada relations deteriorating, air traffic has declined sharply this year. In Q1, transborder revenues were down 5% YoY, and management expects low-teens average booking declines over the next six months.

The company is trying to contain damage and switch capacity to other destinations. However, uncertainty around the outlook is clearly elevated. This month, the 2025 guidance for adj. EBITDA was cut a bit from prior C$3.4bn-C$3.8bn to C$3.2bn-C$3.6bn.

The second issue is that Air Canada is in the midst of a massive C$18bn CapEx program, aimed at fleet modernization and various customer experience upgrades. As a result, capital spending has been sharply elevated and will stay so in the upcoming years. In 2023, CapEx stood at C$1.6bn, this year it’s estimated at C$3.5bn, and in 2027 at C$5bn. As a result, free cash flow has dried up. The company is guiding for just C$0–C$200m in FCF this year, compared to C$1.3bn in 2024 and C$2.7bn in 2023.

The company expects this spending to materially improve its financials from 2028 onwards, but it also introduces some risk given the current macro turbulence. The offsetting factors here are that CAPEX will be largely financed by cash generated from operations, and that AC’s leverage is quite low at the moment (1.4x net debt to adj. EBITDA). All of this makes valuation hard to pin down, and it could be argued that Air Canada deserves a discount to peers, at least while CapEx remains elevated.