LAN & TAM Merge - Analyst Blog

LAN Airlines S.A. (LFL) and TAM S.A. (TAM) finally signed agreements for their merger which was proposed in August 2010. The merged entity is christened as LATAM Airlines Group S.A. (LATAM).

On conclusion of the merger, LAN will become the parent company with a 73% stake in TAM and shareholders of TAM will receive 0.9 shares of LATAM for each share of TAM. It will be an all-stock transaction of approximately $2.7 billion.

The merger is expected to provide annual synergies of approximately $400 million, out of which approximately $133 million will be realized in the first year of the close of transaction and $267 million in the next two years. Passengers and cargo customers of both companies will benefit from the increase in the number of flights, destinations and connections.

LAN will benefit from the geographical diversification. Moreover, LAN is well positioned to benefit from the global economic recovery, particularly from the emerging economies in Latin America.

The economic growth in the emerging markets will be higher than the developed markets. These markets have considerably boosted passenger traffic both domestically and internationally, and would continue to do so in future. LAN's continuous fleet expansion and renewal program are also expected to fetch profitable returns in future.

Recently, LAN signed a memorandum of understanding for buying 50 modern Airbus A320 family aircraft to be delivered between 2012 and 2016. It has also signed an agreement with The Boeing Co. (BA) for five 787-8 Dreamliner aircraft for delivery in 2012 in addition to ten Boeing 787-8 Dreamliners announced in March 2010.

During the third quarter of fiscal 2010, LAN recorded a 14.2% increase in passenger traffic and 19.0% in cargo traffic. The primary reason for this increase was the new routes to United States, Europe, Mexico and the Caribbean together with improving economic conditions.

Traffic also increased in all the three months of the fourth quarter of fiscal 2010 with 16.0% in October 2010, 11.2% in November 2010, and 13.7% in December 2010.

We reiterate our Neutral recommendation on LAN and Outperform on TAM for the long term. The ADRs retains its short-term Hold rating (Zacks #3 Rank) on LAN and Strong Buy rating (Zacks #1 Rank) for TAM.

 
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