LAN and TAM airlines may appear Latin America's 'perfect
couple', but what are the strengths and weaknesses of the LATAM (
LFL
,
quote
) marriage?
Let's start with the weak points. While the June 22nd merger was
called a takeover, it's not a full takeover. In fact due to
Brazilian law restrictions, TAM's current shareholders are
keeping 80% of voting power.
At the same time, LAN shareholders have 70% of the ownership
of the merged company. Enrique Cueto (LAN) is assuming the new
LATAM company's CEO position and Mauricio Rolim Amaro (TAM) will
remain chairman.
The two companies will continue to operate on their own, which
for experts presents risk.
Adding to the different control structures, there is a
culturally difficult relationship between Brazilians and
Chileans. This can only broaden risks. Recently analysts at
Raymond James kept both shares under 'market perform' given this
complexity.
Then there's the global airline alliances issue: the Chilean
Antitrust Authority (Tribunal de Defensa de la Libre Competencia)
said LATAM could not join the OneWorld Star Alliance due to the
conflict with AviancaTaca. Given that LAN is already a member of
Oneworld, that would be the natural move for the merged company.
However, Enrique Cueto said last week that they "will negotiate
to get the best deal" and that there are "several options".
Another hiccup might be borrowing costs for LATAM. Analysts
are frowning about the credit ratings of both companies and
believe that maintaining them will be a challenge. They are
betting on a dividend cut as a solution.
Brazilian growth also remains a challenge, thanks to the euro
zone crisis and its global echoes. Additionally, national
competition is increasing and fuel prices keep surging, which has
led TAM to report losses twice in the last four years.
Enough with the bad news. As far as the 'perfect match', LAN
and TAM's routes have an overlap of only 3% and, as Mr. Cuero
underlines, "this is a growth merger." The Brazilian market is
still the largest in the area. Plus, it may allow for better
negotiations on network agreements with European and U.S.
airlines.
The merger puts 40% of passenger traffic within South America
in the hands of LATAM. The company will also rank as the
second-largest airline by passengers after American Airlines (
AAMRQ
,
quote
) on routes to the U.S., and third-largest to Europe.
Moreover, Standard & Poor's stated the market
value of LATAM will exceed all other airlines in the world.
Estimates point to a $13 billion market cap.
The other good news is the annual operating income gains. They
are expected to rise by $600 million to $700 million by the
fourth year due to higher passenger sales, cargo, and cost
reductions. LATAM will be able to create larger route networks
and efficiencies to offset high fuel prices.
Finally, LATAM shares will begin trading today on the New York
Stock Exchange, the Santiago Stock Exchange and the São Paulo
Exchange. TAM shares will be delisted in Brazil and the U.S.,
which poses a problem for minority shareholders. According to
experts, the best option is to exchange stocks from a company
with some managing problems (TAM) for the new one (LATAM), with
synergy gains.
Investors should also keep an eye on Brazilian TAM's
competitor Gol Linhas Aéreas Inteligentes S.A (
GOL
,
quote
), as well as Brazilian jet manufacturer Embraer (
ERJ
,
quote
).
