WRAPUP 2-A LatAm airline colossus is born with TAM-LAN deal

Fri Aug 13, 2010 8:27pm EDT

* TAM-LAN merger would create LatAm's biggest airline

* All-stock transaction worth about $2.7 billion

* Will serve booming regional airline passenger traffic

* TAM shares rise 27.6 pct on deal, LAN rises 7.7 pct (Adds details on deal, comments, context)

By Elzio Barreto and Brad Haynes

SAO PAULO/SANTIAGO, Aug 13 (Reuters) - Brazil's TAM and Chile's LAN announced a proposed merger on 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 (LFL.N) would hold a hefty ownership of TAM (TAM.N) 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.

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Graphic on the two airlines: link.reuters.com/gug94n

FACTBOX of top global airlines: [ID:nN13223379]

For a snap analysis on the deal, see: [ID:nN13228334]

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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 on 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 TAMM4.SA jumped 27.6 percent to close at 36.20 reais in Sao Paulo. LAN LAN.SN 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 highly profitable.

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.

POLITICAL SENSITIVITIES

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 [BTG.UL] 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 IBLA.MC and British Airways BAY.L, plus a planned combination of UAL Corp UAUA.O and Continental Airlines. CAL.N. (Additional reporting by Alonso Soto in Santiago and Guillermo Parra-Bernal in Sao Paulo, Writing by Brian Winter, Editing by Todd Benson)

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