May 9, 2008 / 12:09 PM / in 10 years

ACE launches C$500 mln buyback as net income falls

CALGARY, Alberta (Reuters) - ACE Aviation Holdings Inc ACEa.TO, parent of Air Canada ACa.TO, took another step toward winding up operations on Friday, announcing it will buy back about 42 percent of its stock as it posted a first-quarter net loss due to one-time charges.

ACE also said that surging jet fuel prices and weak North American airline industry conditions are complicating matters as it weighs its options for its 75 percent stake in Air Canada, the country’s dominant carrier.

The holding firm plans to buy C$500 million ($495 million) of its shares from stockholders for between C$21 and C$24 each, depending on the number and price at which they are tendered.

The offer for about 23.8 million shares will lift ACE’s total buybacks this year to C$2 billion, after it completed a C$1.5 billion bid in January.

As part of the windup, Chief Executive Robert Milton is studying whether to buy back Air Canada’s minority stake or float its shares in a secondary offering.

In February, Milton said he had been fielding calls from private equity firms interested in launching a buyout of Air Canada or linking it up with a U.S. carrier.

Market conditions have now hampered that option, he said.

“Given, in particular, fuel prices, the likelihood of something happening imminently with Air Canada vis a vis a sale is low,” Milton told analysts. “But we’re going to continue to monitor the situation and keep all our options open.”

Last year, executives said they expected to end the holding company structure around March 2008, but Air Canada’s stock price then came under pressure.

Meanwhile, ACE expects to sell its remaining 9.5 percent interest in Jazz Air JAZ_u.TO and 9.9 percent stake in Aeroplan AER_u.TO “over the next number of weeks,” Chief Financial Officer Brian Dunne said.

ACE’s A-series shares surged C$1.46, or 7 percent, to C$21.51 on the Toronto Stock Exchange on Friday amid the company’s statements.

In the first quarter, ACE lost a net C$182 million, or C$2.96 a share, compared with a year-earlier loss of C$72 million, or 70 Canadian cents a share.

It said the result included a C$125 million provision, announced by Air Canada on Thursday, for an international investigation into alleged price-fixing by a host of cargo carriers.

Other one-time items included an C$89-million foreign exchange loss and C$38-million aircraft impairment charge. ACE also had a gain of C$89 million from a sale of Jazz units.

Operating revenue was C$2.7 billion, up nearly 4 percent.

The results follow a deep first-quarter net loss at Air Canada, mostly due to one-time charges. The airline’s operating showing was better than expected.

ACE pocketed C$343 million from its latest sale of Aeroplan units in April, lifting its cash tally to C$886 million.

Also on Friday, Aeroplan said it is scrapping its income trust structure following a 2006 move by the Canadian government to remove trusts’ tax advantages, and will become a dividend-paying corporation.

Aeroplan said it will set its quarterly dividend at 12.5 Canadian cents a share after the restructuring is completed around June 25. The trust will still pay monthly distributions for this month and next.

In the quarter, Aeroplan earned C$62 million, or 31 Canadian cents a unit, up 24 percent from year-earlier C$50 million, or 25 Canadian cents a unit.

Its trust units were up 44 Canadian cents, or nearly 3 percent, at C$16.74 in Toronto.

($1=$1.01 Canadian)

Additional reporting by Leah Schnurr and Ka Yan Ng; editing by Peter Galloway

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