LAN and TAM announce intention to combine to form new Latin American airline group

LAN Airlines and TAM announced (13-Aug-2010) that they have entered into a non-binding MOU that outlines their intentions to combine their holdings under a single parent entity. Details include:

• Overview: The combination would create a new Latin American airline group that would offer passenger and cargo services across the continent and around the world. The new group, to be known as LATAM Airlines Group, would include Lan Airlines and its affiliates in Peru, Argentina and Ecuador; Lan Cargo and its affiliates; TAM Lineas Aereas; TAM Mercosur and all other holdings of LAN and TAM;
• Scope: The combined airline group would provide passenger services to more than 115 destinations in 23 countries while providing cargo services throughout Latin America and across much of the globe. The airlines of the group would operate a fleet of more than 220 aircraft, and have more than 40,000 employees. In 2009 these carriers had combined revenues of USD8.5 billion, carried more than 45 million passengers and carried combined cargo of 832,000 tons (this would make the carrier the world's 11th largest in terms of passenger traffic and the 15th by revenue). The Group would be among the leading airline groups in the world in terms of size, profitability and market reach. The combined airlines would have more than 200 aircraft scheduled for future delivery;
• Synergies: The combination is expected to generate annual synergies of approximately USD400 million. These synergies are expected to come broadly in equal proportion from alignment of the passenger networks, growth in the cargo network (both internationally and in Brazil), and reduced cost. Management expects that it would be able to implement approximately one third of the synergies within the first year following the close of the transaction and all synergies by the end of the third year;
• Structure: The all-stock transaction would consolidate the economic interests of LAN and TAM under a single parent entity while satisfying the foreign ownership and control requirements of each country where they operate. In connection with the transaction, LAN Airlines would be renamed LATAM Airlines Group SA (LATAM) and would serve as a parent company that will align activities for all group holdings;
• Operating certificates/brands: Each of the airlines in the group would continue to operate under their existing operating certificates and brands;
• Listing: LATAM would retain its listing in the Santiago Stock Exchange and its ADR listing in the New York Stock Exchange and plans to list its shares, via BDRs, in the Bovespa in Brazil;
• Headquarters/governing structure: TAM would continue to operate as a Brazilian company with its own structure. The current holdings of LAN Airlines SA would operate as an independent business unit within the group (and be referred to as LAN Airlines). Each airline within the group would maintain its current headquarters and governance structure;
• Shareholders: The controlling shareholders of LAN and TAM have agreed to a governance model to jointly manage strategic decisions relating to the alignment of the activities of LATAM group holdings. TAM shareholders would be offered 0.90 shares of common stock of LATAM for each share of TAM. TAM's controlling shareholders, Tam Empreendimentos e Participacoes, will reportedly retain control of the Brazilian company with an 80% voting stake and will also own an undisclosed stake in LAN. LAN's controlling shareholders, Costa Verde Aeronautica SA and Inversiones Mineras del Cantabrico will also retain control of the Chilean airline (Reuters/Bloomberg, 13-Aug-2010). Meanwhile, LAN CFO, Alejandro de la Fuente, stated LAN shareholders will own approximately 73% of the combined company and TASM shareholders will hold the rest under terms of a non-binding agreement (Bloomberg, 13-Aug-2010);
• Executive appointments: Mauricio Rolim Amaro, currently Vice-chairman of the Board of Directors at TAM SA, will serve as Chairman of Board of Directors of LATAM and Enrique Cueto, currently CEO of LAN, will serve as LATAM CEO. Within the Group, Maria Claudia Amaro, currently Chairman of the Board of Directors of TAM, will serve as Chairman of TAM under the new structure. Marco Bologna, currently President/CEO of TAM SA will serve as CEO of TAM. Libano Barroso, currently president of TAM Lineas Aereas SA, will remain in that capacity. Ignacio Cueto, currently President/COO of LAN, will serve as CEO of LAN Airlines;
• Employees: Employees would, according to the carrier, benefit from enhanced career opportunities and faster growth as a result of the combination. The scale and diversity of the new carrier would provide more stability and greater financial strength, benefiting all stakeholders;
• Cargo: Cargo customers would have access to the most comprehensive cargo network in Latin America - with more capacity, frequency, and destinations than any other carrier. The combined carriers would work quickly to ensure that customers can book, ship and track cargo seamlessly across the expanded network;
• Alliances: TAM is a member of the Star Alliance, while LAN is a member of oneworld;
• Negotiations: Under the MOU, the two companies will now engage in exclusive negotiations towards a binding definitive agreement, which shall be subject to reaching agreement on the final documentation, due diligence, respective corporate and shareholder approvals and actions, and regulatory approvals. According to the airlines, "No assurances can be given that a binding definitive agreement will be entered into or that the combination will be completed";
• Approvals: The transaction is subject to both parties entering into a binding definitive agreement and satisfaction of conditions, including corporate and shareholder approvals and actions and regulatory approvals;
• Advisors: BTG Pactual is acting as the financial advisor for TAM, while JP Morgan Securities is the financial advsior for LAN (Bloomberg, 13-Aug-2010);
• Share price: At close of trade on Friday, TAM shares soared 27.6%, with LAN shares gaining 7.7%. Meanwhile, Chile's local bourse has now halted the trading of LAN shares following the stock price gain (Reuters, 13-Aug-2010). The gains took LAN's market value to USD9.2 billion, and TAM's market value to USD2.9 billion. [more]

TAM: "This is the completion of the vision of our founder, Captain Rolim, who believed that in an open skies market, a large Latin American airline group would provide much more competitive services to our passengers and cargo customers. Combining our strengths and complementary networks will bring great benefits to our customers, employees, shareholders and Latin America. Together, LAN and TAM will be able to offer new destinations that neither company could have supported on its own. This will position us to compete with the foreign carriers that continue to increase service to our region while creating new jobs in our home countries," Marco Bologna, CEO. Source: Company Statement, 13-Aug-2010.

LAN Airlines: "Today is a great day for LAN, our customers, our employees and our shareholders. Together we have built LAN into a true leader in Latin America. We have much to be proud of and much to be thankful for. But as the industry consolidates, we cannot stand still. Today we announced our intention to join forces with our friends at TAM, setting forth on a journey that will create one of the leading airline groups in the world. We have great admiration and respect for our friends at TAM and have enjoyed many years of collaboration. They share our passion for service, for integrity and our belief in the great potential of the Latin American market. With this combination, we take two Latin American leaders and create a global leader that will make Latin Americans proud," Enrique Cueto, CEO. Source: Company Statement, 13-Aug-2010.