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LAN Airlines and TAM soar, despite mixed responses from analysts; GOL tumbles intra-day


South American airline stocks continued to soar on Monday (16-Aug-2010) as investors continued to buy up TAM and LAN Airlines stock following their proposed merger. North American airline stocks were mixed, as the Dow ended trading flat.

Brazil’s Bovespa (+0.7%) gained on TAM’s rise, despite news Brazil’s economy may expand 7.09% this year, less than the 7.12% forecast last week. Chile’s IPSA (+0.1%) was relatively flat, mirroring weaker stock markets globally for the day. 

LAN Airlines and TAM soar, despite mixed responses from analysts

LAN Airlines (+2.2%) reached a 52-week high of USD30.50 for the day, with approximately 1.7 million shares changing hands during the session.

Fitch Ratings put LAN on watch for a possible downgrade, while TAM soared after Fitch put the carrier’s stock on watch for a possible upgrade. According to the analysts, LAN’s cash generation has been steady over recent years, while TAM’s cash generation and profit margins have declined over the past three years.

As a result, LAN’s 'BBB' Issuer Default Ratings (IDR) are now on Rating Watch Negative, while the following have been placed on Rating Watch Positive for TAM:

  • Local currency IDR at 'B+';
  • Foreign currency IDR at 'B+';
  • Long-term national scale rating at 'BBB+(bra)'.
  • USD300 million senior unsecured note due to 2020 at 'B+/RR4';
  • USD300 million senior unsecured note due 2017 at 'B+/RR4';
  • BRL500 million debentures issuance due 2012 at 'BBB+(bra)'.

However, Fitch described the merger deal is “positive”, stating it is a “good opportunity for the carriers to grow and take advantage of commercial, financial, and operational synergies”.

Other ratings for LAN made during trading are as follows:

  • SmarTrend stated it is bullish on the carrier’s shares and maintains its ‘Buy’ rating;
  • Bank of America Corp raised its rating of LAN’s stock from ‘Neutral’ to ‘Buy’, citing its plans to purchase TAM. The analysts stated the carrier will benefit from having a stake of about 70% in the new LATAM Airlines Group, particularly from “scale, routes, overhead overlaps, diversification and combined expertise”.

TAM bonds meanwhile took their biggest gain since being issued in Oct-2008.

  • Bank of America Corp dropped coverage of TAM, which will be delisted under the agreement. It was previously rated at ‘Neutral’;
  • Itau Unibanco stated TAM’s stock may continue to gain, with the proposed exchange ration still leaving a 17% upside;
  • Morgan Stanley suggested TAM investors consider taking profits in the carrier’s stock, as there is “significant” uncertainty around the deal;
  • Citigroup analyst, Stephen Trent, stated the group is adding TAM to its Top Picks Live list. Mr Trent stated the deal appears to be a “no-brainer” for TAM buyers, as LAN, with its “high-earnings quality”, purchases TAM, which has the “weakest margins, the weakest balance sheet and an expensive valuation”;
  • Banco Santander stated TAM’s shares may outperform LAN’s in coming days, as LATAM’s “implicit fair value” is above the airlines’ combined market value based on estimated synergies.

See related CAPA Profile: Mergers and Consolidation

Elsewhere, GOL (+1.1%) took its biggest intra-day tumble since 06-May-2010 on news of the merger, before making a comeback in afternoon trading. The merger provides somewhat of a challenge for GOL, as LAN will now be looking to grow in Brazil.

See related reports:

COPA (+2.1%) meanwhile made gains. 

In North America, Republic Airways' (+4.0%) shares rebounded, while Allegiant (-1.7%) and American Airlines (-0.7%) fell.

North & South America selected airlines daily share price movements (% change): 16-Aug-2010

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