LAN & TAM Agree to Merge - Analyst Blog

Latin American airline operators, LAN Airlines S.A. (LFL) and TAM S.A. (TAM) have signed a MoU to merge operations and form a new company called LATAM Airlines Group S.A. (LATAM). LAN will become the parent company with a 73% stake in TAM and the 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. However, the merger is awaiting various regulatory approvals.

On combination, LATAM will become the world’s 11th largest airline company in terms of passenger traffic with a fleet of more than 220 aircraft providing services in more than 115 destinations in 23 countries. During fiscal 2009, LAN and TAM together generated $8.5 billion of revenues by carrying a total of 45 million passengers and 832,000 tons of cargo.

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 will also stand to benefit from the increase in the number of flights, destinations and connections.

This is expected to be great news for the Latin American airline industry, which has performed reasonably well despite the sluggish economic environment. Moreover, the economic growth in emerging markets, particularly in Latin America, will be higher than the developed markets.

The parent company is expected to have an extensive reach with LAN’s strong presence in South America and TAM's numerous routes to Europe. TAM is also a member of Star Alliance, a global airline network. Thus, following the news, the ADR prices of both LAN and TAM rose by 8.6% and 4.1%, respectively.

Our long-term recommendation on both the stocks remains Neutral, awaiting the proposed merger. However, over the short-term, TAM has a Zacks #2 Rank ('Buy'), while LFL has a Zacks #3 Rank ('Hold').
 
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