Montreal-based Air Canada pursued Transat to boost its leisure travel business against the backdrop of a potential turnaround at rival WestJet Airlines under a new owner.

Canada's largest airline secured Transat board approval for the C$13 a share deal despite a challenge from Montreal real estate developer Group Mach, which weighed in with a C$14 per share offer.

Transat stock has surged more than 34% since exclusivity talks with Air Canada began in May, closing Wednesday at C$14.19, as investors anticipated a sweeter deal.

Shares of Transat, which initially dropped 7.4% on news of the deal, pared losses to C$13.33, shortly after midday.

Transat Chief Executive Jean-Marc Eustache called the agreement "the best option for all our stakeholders," saying it would expand the Montreal-based company. Transat, with 5,000 employees, also owns and operates Air Transat, Canada's third-largest airline.

Mach's offer had raised questions since the company first said it needed government financing to complete the deal, a condition it waived on Tuesday.

Two-thirds of Transat shareholders must approve the deal, a company spokesman said.

"We believe Air Canada's offer doesn't reflect the value of Air Transat," said Amar Pandya, a senior investment analyst and portfolio manager for Vancouver-based PenderFund Capital Management, which holds 3.95% of Transat shares according to IBES data from Refinitiv.

Pandya encouraged other parties to make higher formal offers to the Transat board.

Letko, Brosseau and Associates, Transat's largest shareholder, had urged the company to drop the deal, The Globe and Mail reported last month.

The Montreal-based investment manager, which is also the largest shareholder in Air Canada according to IBES data, declined to comment.

The deal, which would keep Transat's head office and key functions in Montreal, is expected to be completed early next year, subject to regulatory approval.

Transat is required to pay C$15 million if it backs out of the agreement in favor of a fully financed offer of C$14 a share or more that is not matched by Air Canada. However, the carrier must pay Transat up to C$40 million if regulatory approvals are not obtained, under certain conditions.

(Reporting by Allison Lampert in Montreal and Debroop Roy in Bengaluru; Editing by Anil D'Silva, Sriraj Kalluvila, Cynthia Osterman and Richard Chang)

By Allison Lampert