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Canada's Cargojet inks deal with Amazon to grow business with online giant | The Star

MISSISSAUGA, Ont. - Shares in Cargojet Inc. shot to a record high Friday after the company announced a new deal with Amazon.com that could see the online retailer acquire a stake in the company that provides overnight air cargo services.

The company’s shares opened up more than 20 per cent before closing up $11.66, or 12.86 per cent, at $102.33 on the Toronto Stock Exchange.

Amazon already uses Cargojet’s charter aircraft services to move packages from Amazon warehouses to distribution centres for final delivery, but the deal announced Friday is designed to encourage it to use the network even more.

“The commercial relationship the Cargojet team continues to build with Amazon has now allowed us to further strengthen and align our long-term strategic commercial interests,” Cargojet chief executive Ajay Virmani said in a statement.

“Our continuous commitment to provide value-added services enables us to earn all of our customers’ trust as the leading overnight air-network operator.”

Under the agreement, Mississauga, Ont.-based Cargojet will issue warrants to Amazon for variable voting shares that will vest based on milestones of business that Amazon gives Cargojet.

The first tranche will allow Amazon to buy up to 9.9 per cent of Cargojet’s variable voting shares at an exercise price of $91.78 per share. They will vest over a period of six-and-a-half years, with vesting tied to the delivery by Amazon of up to $400 million in business to Cargojet.

Amazon could acquire up to an additional five per cent of Cargojet’s shares if it provides an additional $200 million in business after the first tranche of warrants is fully vested.

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The deal removes a key risk that Amazon could have signed with another Canadian carrier for overnight delivery services, said RBC Capital Markets analyst Walter Spracklin in a note.

“Overall, this is a clear positive for shares of CJT,” said Spracklin.

The deal between Amazon and Cargojet comes as competition remains fierce in the delivery side of online retail.

FedEx said in June it wouldn’t renew a contract with Amazon for air shipments, saying it would concentrate on serving competitors such Target, Walgreens and Walmart.

The decision came as Amazon continued to expand its own ground and air delivery fleet to control how its packages are delivered and rely less on outside carriers.

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The company announced in June it will lease 15 Boeing 737s to get packages to their destination faster. It says it had 42 planes at the time, with plans for 70 in its fleet by 2021, but that its fleet of planes fly within the U.S.

Canaccord Genuity analyst Doug Taylor said in a note that the deal between Amazon and Cargojet makes clear that Amazon isn’t keen to make similar efforts to establish its own air cargo network in Canada.

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“We view the agreement positively as it de-risks that growth profile and removes what little chance there was that Amazon might get creative on how it moves overnight volume in Canada.”

Companies in this story: (TSX:CJT)

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