LAN Completes TAM Takeover To Form LATAM

June 22, 2012

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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 USD$700 million in annual cost 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.

Chief executive Enrique Cueto said 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 São 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 staff costs, an unwieldy tax burden and overcrowded airports.

Industry consolidation and reduced capacity by TAM's rival Gol 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 rising demand for air travel.

With higher ratings, LATAM will be able to borrow at a cheaper cost while operations rise globally, Cueto added. Both companies kept their aircraft orders plans unchanged.

"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 indebted TAM -- the combined company was born with USD$11.99 billion in debt.

Fitch Ratings on Friday lowered LATAM's ratings on global debt to "BB plus" from "BBB," citing the company's high debt levels and constrained cash holdings following the combination.

The ratings company also said that the new rankings, which are one level below investment-grade, reflect the carrier's "record of maintaining a relatively stable credit profile through the economic cycle... and the deterioration in its credit metrics" over the past two years.

SHARE SWAP

Shares of LAN fell 0.8 percent to 13,540 Chilean pesos, the first decline in six sessions. TAM shares will be delisted.

Chile's Cueto family, the majority shareholders in LAN, came to São 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 creating regional demand for goods and services. LAN took control of TAM through an all-stock transaction worth an estimated USD$2.7 billion.

The completion of the tie-up will allow LATAM Airlines to generate additional revenues and cost savings between USD$170 million and USD$200 million in the first year of operations.

LATAM Airlines will fly to 150 destinations in 22 countries, stretching from Frankfurt to Sydney.

LAN's and TAM's revenues exceeded USD$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 it will stick with. Currently LAN is a member of the oneworld alliance, while TAM belongs to Star Alliance.

(Reuters)