Porter Aviation Seeks C$120 Million in Share Sale Amid Stock Market Slump

Canadian fund manager David Baskin says Porter Airlines is a great carrier. He’s not sure it will be a great stock to own following its initial public offering.

“Everybody who flies Porter likes it,” said Baskin, who oversees $328 million as president of Baskin Financial Services Inc. in Toronto and isn’t buying Porter shares. “I’ve never heard anybody say a bad thing about the flight experience. That doesn’t necessarily mean they’re going to make money.”

Porter Aviation Holdings Inc., owner of the Toronto-based airline that was formed in 2006, plans to raise about C$120 million ($115 million) to expand operations and buy Bombardier Inc. Q400 planes. The company is offering 17.1 million to 20 million shares at C$6 to C$7 each, according to sale documents, for a market value of as much as C$417 million. The IPO, planned for this week, will be pushed back to next week, two people familiar with the sale said.

Porter is seeking a premium of more than five times the valuation of Calgary-based WestJet Airlines Ltd. just as the biggest surge in stock-market volatility in two decades curbs demand for initial offerings.

At least 17 companies around the world have postponed or withdrawn sales this month, while C&C Energy Canada Ltd. of Calgary cut its IPO size by 39 percent. Canada’s Standard & Poor’s/TSX Composite Index has slid 4.5 percent in May.

Porter, which has yet to post an annual profit, had sales of C$151.2 million and a loss of C$4.61 million in 2009, according to its April 16 filing. The airline, which uses a raccoon to market its brand, flew 913,000 passengers last year, more than triple the number in 2007, as it added planes and routes to cities including Chicago and Boston.

Porter Investors

Porter was started with C$125 million from investors including Borealis Infrastructure, which invests for Ontario Municipal Employees Retirement System; EdgeStone Capital Partners; GE Asset Management and Dancap Private Equity Inc. Porter shareholders aren’t selling stock in the IPO. RBC Capital Markets is leading the offering, along with eight other banks.

Based on the forecast IPO price range, Porter would have an enterprise value, or the sum of its stock and debt minus cash, of about 4.47 to 4.78 times 2009 sales, company documents show. That compares with a ratio of 0.88 for WestJet, 0.38 for Air Canada, and 0.91 for Dallas-based Southwest Airlines Co., data compiled by Bloomberg show.

“It’s being priced quite richly,” said Luciano Orengo, who oversees C$1.2 billion at MFC Global Investment Management in Toronto. Orengo met Porter’s management last week and won’t invest in the IPO.

Relative Value

Porter is also asking for a premium based on earnings before interest, taxes, depreciation and amortization, or Ebitda. The carrier’s estimated enterprise value is about 86 times its 2009 Ebitda. That compares with a ratio of 11 for Southwest and 5.7 at WestJet.

Still, Porter has “nice assets” including 20 new fuel- efficient planes, an expanding network of 14 destinations, and an island airport near Toronto that’s free of competitors, according to Karl Moore, a professor of business at McGill University in Montreal who specializes in the airline industry.

“Porter’s IPO would appeal to someone with nerves who’d accept some risk,” Moore said.

The initial offering will be Canada’s first by an airline since Air Canada’s IPO in November 2006. The country’s largest carrier sold C$525 million in stock at C$21 each. The shares fell 18 percent in the first 30 days, and closed at C$1.76 on the Toronto Stock Exchange yesterday, for a 92 percent decline since the IPO.

Air Canada

Jazz Air Income Fund, owner of a regional carrier that operates flights for Montreal-based Air Canada, has plunged by more than half since its initial offering in 2006.

“IPOs in the aviation world in Canada have not been that successful,” said Rick Erickson, managing director of RP Erickson & Associates, a Calgary-based independent aviation consultant. “It’s always a gamble in this business, seemingly more than other sectors.”

U.S. carriers have also struggled, with Delta Air Lines Inc., Northwest Airlines Corp., US Airways Group Inc. and United Airlines parent UAL Corp. filing for bankruptcy protection in the last decade. The 12-company Bloomberg U.S. Airlines Index has fallen 61 percent in the past 10 years.

WestJet has been an exception. Canada’s No. 2 carrier rose 32 percent in the first month of trading in 1999. The stock has climbed threefold since its IPO, adjusting for stock splits.

The historic performance of airlines isn’t a selling point for Baskin, whose funds outperformed the S&P/TSX and the S&P 500 based on a 10-year return.

“Investing in airlines is like a second marriage,” he said. “It’s the triumph of optimism over experience.”

To contact the reporter on this story: Doug Alexander in Toronto at dalexander3@bloomberg.net

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