By Elzio Barreto and Brad Haynes
SAO PAULO/SANTIAGO, (Reuters) - Brazil's TAM and
Chile's LAN announced a proposed merger Friday that would
create Latin America's largest airline and compete for the
region's booming demand for passengers and cargo.
The new entity, to be named LATAM Airlines Group, will be
created via an all-stock transaction worth about $2.7 billion.
The combined airline would rank as the world's 11th biggest in
terms of passenger traffic with 46 million passengers a year,
allowing it to compete globally at a time when several other
major carriers are combining operations.
"We are at a critical time. Airline consolidation is
happening across the globe and our industry is ready for it,"
said Enrique Cueto, LAN's chief executive.
The deal will allow both carriers to keep flying with their
own brands under the control of a holding company. The
structure seems designed to portray a merger of equals that
could help it clear potential legal and political hurdles in
both countries. Brazilian regulations forbid foreigners from
holding more than 20 percent of a domestic airline.
However, LAN would hold a hefty ownership of TAM
shares -- about 73 percent -- if the swap goes through.
Cueto also will be LATAM's CEO, while TAM's deputy chairman
Mauricio Rolim will be the chairman of the combined company.
Shareholders and regulators must also sign off on the
merger, though Cueto said a binding agreement on the plans
could be signed within three months.
The proposal comes at a time when millions of people in
Brazil, Chile and elsewhere around the region are joining the
middle class and starting to fly thanks to robust economic
growth that is outperforming most of the developed world.
Meanwhile, competition for those passengers has
intensified. Colombia's Avianca created another regional giant
last year with El Salvador's Taca, while TAM has endured recent
losses amid a stiff challenge from discount carriers within
Brazil and high costs.
"Emerging markets, particularly the Latin American region
are seeing increasing demand, at a rapid pace. Now is our time
to capitalize on this trend," Cueto said.
The new company will be "a global player for sure," said
Caio Pereira Dias, an aviation analyst with Santander
Investimento in Sao Paulo.
SHARES IN BOTH AIRLINES RISE
As part of the agreement, TAM shareholders will receive 0.9
shares of LAN for every TAM share in the form of Brazilian
depositary receipts. TAM will then delist its shares in Sao
Paulo and in New York.
LAN is offering holders of TAM's non voting local shares a
42 percent premium for their stock, based Thursday's closing
price. Holders of TAM's American depositary receipts will get a
41 percent premium.
LAN will have to issue 99.4 million new BDRs to swap for
100 percent of TAM's preferred shares and 20 percent of the
voting stock. That would value the deal at $2.7 billion.
Shares in both companies rose as news of the transaction
broke. TAM shares jumped 27.6 percent to close at
36.20 reais in Sao Paulo. LAN rose 7.7 percent to
13,900 Chilean pesos in Santiago.
More financial details of the transaction were not
immediately disclosed, though LAN said the merger would have
synergies of about $400 million a year. The companies said that
the two carriers had combined revenues of $8.5 billion last
year and more than 40,000 employees.
The two airlines would appear to compliment each other. LAN
has a strong presence in other South American countries
including Peru and Argentina, while TAM's routes to Europe are
Both use planes from Europe's Airbus for short-haul routes,
and a combination of Airbus and Boeing aircraft for long-haul
routes -- a mix that should give the new entity considerable
leverage when negotiating future aircraft purchases.
The deal also touches on politics in both countries.
Chile's billionaire President Sebastian Pinera, who took
office in March, made much of his fortune by investing in LAN
and sold his some $1.5 billion stake in the carrier this year
after pledging to sell it to avoid conflicts of interest.
Meanwhile, Brazilian President Luiz Inacio Lula da Silva
has repeatedly touted the importance of keeping major companies
in Brazilian hands, though there was no sign of immediate
political opposition to the deal within Brazil.
TAM, which originally stood for Taxi Aereo Marilia, was
founded in 1961 as a small cargo carrier. Eleven years later,
TAM was bought by a pilot named Rolim Amaro, who over the next
three decades turned it into a major airline.
Amaro, who was widely known as Captain Rolim, was killed in
a helicopter crash in 2001. His family members will control 80
percent of the voting shares of TAM after the LAN deal.
LAN is considered one of Latin America's most profitable
airlines, making its mark thanks to a very lucrative cargo
business that sets it apart from many international carriers.
LAN has been looking to expand its presence in Brazil, Latin
America's largest aviation market, for years.
Brazilian firm BTG Pactual is acting as the
financial advisor for the deal for TAM. JP Morgan Securities
Inc. is the financial adviser to LAN.
Other examples of consolidation in the industry include the
merger approved last month between Spain's Iberia and
British Airways, plus a planned combination of UAL Corp
and Continental Airlines..
(Additional reporting by Alonso Soto in Santiago and Guillermo
Parra-Bernal in Sao Paulo, Writing by Brian Winter, Editing by