LATAM Part 1: Merger or Acquisition?

The first big question which is being endlessly debated (at least here in Brazil) is if it is really a merger or did LAN actually buy TAM?

That's a rather touchy subject. Upon first impression it might seem a lot like a 'true merger' rather than an acquisition when it's actually both. To fully understand why that is, we need to go back a few years.

LAN has been trying to get into the Brazilian market for quite a while now. Brazil's domestic air traffic boom has caught the Chilean carrier's attention but it was never able to setup its own passenger airline because of Brazil's 20% foreign ownership restriction. Nevertheless, LAN still sought a way to establish itself in Brazil. Consequently, as a 'first step' to make its way into the Brazilian market LAN, along with local investors, launched ABSA Cargo. ABSA has remained stable throughout the changing economic scenarios while other local cargo operators have 'come and gone'.

The opportunity to finally enter the market arose back in 2006 with the demise of VARIG and the subsequent separation its 'operational arm', which finally resulted in the creation of VRG Linhas Aereas or the 'New Varig' as it was nicknamed. In September of the that same year LAN opened official negotiations and intended to participate in the restructuring process of the 'New Varig' . Later, in January 2007, LAN invested some 17,1 million USD in the 'New Varig', eyeing a minority stake in the new carrier. Eventually LAN's attempt failed as, in a surprise move (most probably achieved through political lobbying), Gol bought the 'New Varig' thus ending LAN's plan to establish a local passenger airline in Brazil.

In the years to come LAN publicly stated its interest in entering the Brazilian market with its own brand. Still it was unclear how they could proceed, after all Brazil's 20% foreign ownership restriction was clearly an obstacle. The provisional solution was the negotiation of a commercial partnership with TAM - at that time and even now, the only major Brazilian carrier with product similar to LAN's - which included the implementation code-share flights and the alignment of the Frequent Flyer Programs.

But that wasn't enough. Even after the implementation of the LAN/TAM code-share agreement (and the subsequent FFP alignment), LAN's CEO Cueto still openly admitted the Chilean carrier continued to seek a way of establishing its very own operation in Brazil.

The solution was finally found in LATAM; through the creation of a holding company which would serve as an umbrella for both LAN and TAM. This would respect Brazil's 20% foreign ownership restriction while at the same time allowing LAN to effectively 'run the show'. Mind you that from an ownership standpoint the Amaro family (TAM) is expected to hold a 13,5% stake of LATAM while the Cueto family (LAN) will have a 24,1% stake. The remainder includes a 15,8% free float from TAM and 46,6% from LAN.

If you weigh everything I just listed above, the combination of LAN and TAM is a merger. And in a way, yes, it's also the way LAN figured out to 'buy itself' into the Brazilian market. Regardless of how you look at it (merger or acquisition), it's a win-win situation for both. LAN and TAM expect that the creation of LATAM will generate roughly 400 million USD in annual synergies - of which 170 million USD will be in new passenger revenue.

NOTE: if you haven't seen it yet, the LAN-TAM Investor Presentation available on LATAM's website shed's some light into the true scale of the proposed tie-up. Just access www.latamairlines.com and see for yourself.

>> Proceed to Part 2 - LATAM: Star Alliance or Oneworld? Or both? >>