Air Canada files challenge over Onex's C$3.5 bln buyout of rival WestJet

MONTREAL, Sept 3 (Reuters) - Air Canada has challenged Onex Corp’s proposed acquisition of WestJet Airlines, on grounds that the deal may not meet the country’s ownership rules, according to a letter sent by the carrier to the Canadian Transportation Agency.

Toronto-based Onex’s planned C$3.5 billion ($2.6 billion) buyout of Calgary-based WestJet has received approval from the carrier’s shareholders and some regulators, but the agency is still reviewing whether the deal meets the country’s protective ownership laws.

Under Canadian rules, foreigners cannot own more than 49% equity in a Canadian airline. The rules further restrict a foreign airline and any single foreign owner from controlling more than a quarter of voting interests in a Canadian carrier.

The likely presence of Onex co-investors such as foreign wealth funds and carriers, and the “opaque nature” of the deal to buy WestJet through company subsidiary Kestrel Bidco, will make it harder to ensure compliance with ownership laws, Air Canada argued in a separate letter to the Canadian Transportation Agency, dated Aug. 15.

“The uncertainty and flexibility of co-investor participation introduces significant risk that non-Canadian co-investors will have control-in-fact of WestJet following the transaction,” Air Canada said.

Air Canada declined to comment on the letter, a copy of which was seen by Reuters. The CTA was not immediately available to comment.

Onex said in a statement that it “is engaged with the CTA on the regulatory approval process of our transaction.”

Air Canada also argued that Onex requires at least a quarter of its board to be Canadian, which is below the government’s threshold for control.

Under the terms of the deal announced in May, Onex’s acquisition of WestJet is set to close later in 2019 or early next year. On Tuesday, WestJet shares were trading down 0.4%, in line with the drop in the benchmark Canadian share index. ($1 = 1.3275 Canadian dollars) (Reporting by Allison Lampert in Montreal Editing by Denny Thomas and Matthew Lewis)