* LAN says wins 95.9 pct of support for share swap
* Combination creates world’s No. 2 airline by market value
By Alberto Alerigi and Antonio De la Jara
SAO PAULO, June 22 (Reuters) – Chile’s LAN Airlines
completed a takeover of Brazilian rival TAM on
Friday, creating the world’s second-largest airline by market
value in a deal that executives expect to yield up to $700
million in costs savings within four years.
The new carrier, called LATAM Airlines Group, takes to the
skies at a time of slowing economic growth and demand for air
travel in Brazil, Latin America’s biggest aviation market. That
means the airline will need to adopt strict cost cuts to boost
profits in a challenging market grappling with high operation
costs and fierce competition from smaller rivals.
Chief Executive Enrique Cueto told Reuters on Friday that he
expects the Santiago-based carrier to win investment-grade debt
ratings within a year mostly because of its ability to produce
significant cost savings. He said the airlines will focus on
improving performance in Brazil and ruled out significant
layoffs during the combination.
“We will focus on Brazil and, as LATAM, we will introduce
important changes in the local airline market,” Cueto said in
Sao Paulo. “There are great opportunities stemming from
stimulating demand and enforcing a disciplined use of capacity,
something that hasn’t happened in years.”
The creation of LATAM Airlines comes amid growing mergers
and acquisitions activity among airlines in Brazil as carriers
struggle with high labor costs, an unwieldy tax burden and
overcrowded airports. Industry consolidation and reduced
capacity by TAM’s arch rival Gol Linhas A (c)reas should
help improve profitability for LATAM, which will count on scale
gains from the merger.
Rapid growth in Brazil, by far the largest airline market in
Latin America, drove ticket prices down, pressuring profits at
TAM, Gol and other carriers in spite of soaring demand for air
travel.
By fetching higher ratings, LATAM will be able to borrow at
a cheaper cost while operations rise globally, Cueto added. Both
companies kept their plane orders plans unchanged, meaning the
need for funds will increase over the coming years.
“The strategy in the long run is to be investment-grade,” he
said. Analysts are concerned that LAN will lose its
investment-grade status as it absorbs highly indebted TAM — the
combined firm was born with $11.99 billion in debt.
SHARE SWAP
Shares of LAN fell 0.8 percent to 13,540 Chilean pesos, the
first decline in six sessions. TAM’s preferred stock shed 0.5
percent to 52.24 reais.
Chile’s Cueto family, the majority shareholders in LAN, came
to S GBPo Paulo to announce the success of a plan to delist TAM
shares in Brazil after 95.9 percent of the latter’s shareholders
tendered their stock in a swap. A minimum two-thirds of all TAM
shareholders was required to approve the transaction.
The share swap was the last step before completing a
takeover that was first announced in August 2010 and went
through tough regulatory scrutiny in Chile, where LAN enjoys a
dominant market position.
The tie-up reflects the increased trade and economic
integration in Latin America, where buoyant job and household
income are fueling regional demand for goods and services. LAN
took control of TAM through an all-stock transaction worth an
estimated $2.7 billion.
In recent years, a dozen of Chilean and Brazilian financial,
retail and pulp making companies have taken advantage of growing
trade to merge and expand.
The completion of the tie-up will allow LATAM Airlines to
generate additional revenues and cost savings between $170
million and $200 million in the first year of operations.
LATAM Airlines will fly to as many as 150 different
destinations in 22 different countries, stretching from
Frankfurt to Sydney.
LAN’s and TAM’s revenues exceeded $13.3 billion last year,
and their combined market value is second only to Air China
among the world’s airlines.
Cueto also said that LATAM Airlines will decide within six
months which airline alliance will stick with. Currently LAN is
a member of the OneWorld alliance, while TAM belongs to Star
Alliance.
