By Allison Lampert and Maiya Keidan
MONTREAL (Reuters) -Air Canada stock ended marginally lower in volatile trading on Tuesday on concerns that existing shareholdings would be diluted after the federal government took an equity stake in the carrier as part of C$5.9 billion ($4.7 billion) in aid.
Analysts and investors said Air Canada's decision to accept the bigger-than-expected aid package was the right decision for Canada's largest carrier as it tries to cope with the crippling downturn in air travel caused by the coronavirus pandemic.
"Definitely a positive development because it's giving them access to a very attractively priced backstop credit facility at very reasonable terms," said Catharine Sterritt, portfolio manager at CIBC Asset Management, a top shareholder.
The deal announced on Monday gives Ottawa a roughly 6% stake in the airline at a discount of 14%, which prompted several analysts to cut their price targets.
"We believe some investors could be negatively surprised by equity dilution and a repayable loan for refunds," Scotiabank's Konark Gupta wrote in a note, while reiterating a "sector perform" rating on the stock.
Air Canada shares opened more than 4% higher before sinking about 6.7% and closed down 0.44% at C$26.88 in Toronto.
"In spite of the dilution we see, we still see a path for this company to be worth in excess of at least C$40 when the COVID situation and the airline situation normalizes all a bit more," Paul Younes, an investment analyst at Letko Brosseau and Associates, which holds the stock, told Bloomberg TV.
Canada is wrestling with soaring COVID-19 cases driven by coronavirus variants and a comparatively slower vaccination rollout than in the United States, raising questions about the reopening of air travel.
"The bigger issue for AC and its investors is the timing around the vaccine rollout and eventual lifting of travel restrictions, as most markets that have reopened show strong pent-up demand," Raymond James analyst Savanthi Syth said in a note.
Prime Minister Justin Trudeau on Tuesday praised the deal with Air Canada as "good and fair."
The agreement - the largest individual coronavirus-related loan that Ottawa has arranged with a company - came after the airline industry criticized Trudeau's Liberal government for dawdling.
TD Securities analyst Tim James said the access to capital would prove to be insurance as opposed to necessary liquidity required to finance operations or capital expenditures in 2021 and beyond. He cut his target price on Air Canada to C$29 from C$31, while reaffirming a "hold" rating.
Air Canada would ease restrictions on future refunds for passengers, a key part of the government talks.
Canada's government also is engaged in aid talks with WestJet Airlines Ltd and Transat AT Inc.
($1 = 1.2589 Canadian dollars)