Amazon signs deal to acquire stake in Cargojet, sending its stock skyrocketing

PARIS, FRANCE - SEP 28, 2018: Small Amazon parcel cardboard box against yellow background smile logo. Amazon Prime is the online paid subscription service offered by web-commerce site Inc. (AMZN) has signed a deal that will see it purchase a stake of Cargojet Inc. (CJT.TO), sending the Mississauga-based company’s stock skyrocketing on Friday.

Cargojet, which provides overnight air cargo services, put out a press release Friday that said it had entered a strategic agreement with NV Investment Holdings LLC, a subsidiary of the e-commerce giant.

Under the deal, Cargojet will issue warrants to Amazon in two tranches, allowing Amazon to acquire up to 14.9 per cent of the company’s voting shares. The shares will vest over a period of 7.5 years once certain commercial targets are reached.

Cargojet’s stock jumped as much as 20 per cent in early trading on the Toronto Stock Exchange Friday to an all-time high of $109. The stock was trading at $106.00 at 9:46 a.m. ET, an increase of nearly 17 per cent.

Amazon already uses Cargojet’s overnight services to move packages.

“Cargojet has been a key player in our Canadian middle mile operations for several years,” Adam Baker, Amazon’s vice president of Global Transportation, said in a statement.

“We’re thrilled to build a longer-term relationship that will allow us to provide even faster service to Amazon customers in Canada.”

RBC Capital Markets analyst Walter Spracklin called the agreement “a clear positive” for shares of Cargojet and said it answers a key question about the company’s future.

“The announcement that Amazon will be taking an equity stake in Cargojet, combined with committed volumes over a 7.5-year period, address the one key risk related to Cargojet – namely whether Amazon would partner with another Canadian carrier to offer overnight delivery service,” Spracklin wrote in a note to clients.

CargoJet, which provides time sensitive overnight air cargo services, saw its share of the air freight market grow from 50 per cent to 95 per cent in 2015 when it won the lucrative Canada Post contract away from Kelowna Flightcraft. Since then, it has been reaping the benefits of the growth of Amazon Prime in Canada.

Cargojet does not report its e-commerce and business-to-business (B2B) results separately in its financial reports. But, RBC said in a note released earlier this year that the company’s total volume grew 7 per cent in 2016, 14 per cent in 2017 and another 14 per cent in 2018 “entirely due to the rise of e-commerce.” RBC estimated that e-commerce represents about 25 per cent of Cargojet’s total volumes, with Amazon representing a majority of that figure.

Amazon is one of the most trusted e-commerce brands for Canadian shoppers, according to a recent survey of 6,900 Canadians conducted by BrandSpark International.

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