Traders Doubt Lan's $4 Billion Takeover Bid of Tam with 16% Discount

Investors are doubting Lan Airlines SA’s ability to complete its planned takeover of Brazilian carrier Tam SA, stock trading shows.

Tam is trading 18 percent below Santiago-based Lan’s Aug. 13 offer price, as much as twice the discount for past global airline combinations a month after they were announced, according to data compiled by Bloomberg.

Concern the $4 billion deal will be quashed or delayed by regulators is keeping the gap from narrowing, said Octavio Vaz, who helps manage $3.3 billion at Global Equity Administradora de Recursos. Brazilian Finance Minister Guido Mantega damped that speculation on Sept. 2, saying the purchase complies with a law limiting foreign control of carriers. The discount shrank for two days before widening.

“You only have this kind of discount if the market thinks it won’t go through or that it’ll take so long it’s not worth it,” Vaz said by phone from Rio de Janeiro. “Mantega isn’t the one who decides. The market didn’t take him seriously.”

Under the agreement, Tam investors will get 0.9 Lan share for each share of Tam. Lan rose 0.1 percent to 14,612 pesos yesterday, meaning 0.9 of each share is worth 45.35 reais. Tam fell 2 percent to 37.30 reais at the close of trading in Sao Paulo at 4 p.m. New York time. While Chilean markets are closed today for a national holiday, Lan’s American depositary receipts dropped 1.6 percent to $28.30.

Foreign Control

The takeover must be approved by regulators in Brazil and Chile. It calls for Tam’s controlling shareholders to keep 80 percent of its voting stock to preserve Brazil’s 20 percent foreign ownership cap. Lan will hold about 70 percent of the combined carrier, Latam Airlines Group. Latam in turn will own “substantially” all of Tam’s preferred shares, which have a market value 77 percent greater than the voting shares, and Tam will be delisted, according to the pact.

The deal’s completion depends on Brazilian regulators determining that it meets the “spirit of the law” that limits foreign ownership, said Cleveland Prates Teixeira, a former director of Brazil’s antitrust agency who advises companies on regulatory issues.

Brazil’s Congress has been debating an increase in the limit on foreign control of airlines since 2004. A recent amendment to a bill introduced in July 2009 would permit foreigners to have sole ownership in Brazilian carriers depending on bilateral government accords. Lawmakers, campaigning for reelection in October, have yet to vote on it.

Failed Combinations

Tam’s discount to Lan’s offer price is bigger than in past deals. Northwest Airlines Corp. traded at a 7.3 percent discount to Delta Air Lines Inc.’s bid, down from a 30-day average of 11 percent, one month after Delta proposed a takeover in April 2008, data compiled by Bloomberg show. Iberia Lineas Aereas de Espana SA traded at an 11 percent discount to British Airways Plc’s November 2009 offer a month after it was made, from a 12 percent average. Tam has had an average 17 percent discount to Lan since the deal was announced last month.

While Delta’s $2.75 billion purchase of Northwest was completed, other mergers failed due to regulators’ antitrust concerns. Ryanair Holdings Plc made unsuccessful takeover bids for Aer Lingus Group Plc in 2006 and 2008, and UAL Corp. and US Airways Group Inc. scrapped a $12.3 billion deal in July 2001.

Other airlines are more attractive than Tam, said Greg Lesko, who helps manage $750 million at Deltec Asset Management in New York.

“Until it’s done, it’s not done,” Lesko said of the Tam takeover. “We like to buy what we think is undervalued.”

Brazilian Approval

Deltec sold “most” of its Tam stake and added to holdings of Panama City-based Copa Holdings SA, Lesko said. Deltec, which doesn’t own Lan shares, maintained its holding of Brazilian carrier Gol Linhas Aereas Inteligentes SA. Gol trades at 13.9 times reported earnings, compared witha ratio of 11 for Copa and 33.8 for Tam, data compiled by Bloomberg show. Lan trades at 32 times profit.

Press officials for both carriers; Brazil’s National Civil Aviation Agency, known as Anac; and the country’s antitrust regulator, the Administrative Council of Economic Defense or Cade, declined to comment on the approval process for the deal, asking not to be named because they aren’t authorized to speak publicly. By law both Anac and Cade must approve the takeover.

Chile’s competition regulator, the Fiscalia Nacional Economica, said it would investigate possible market concentration in three air routes due to the merger. The agency doesn’t have a timeframe for its investigation, press officer Kareen Calcagno said by phone.

Legal Requirements

Tam, based in Sao Paulo, on Aug. 12 posted a second-quarter loss of 154.1 million reais ($87 million) with net sales of 2.61 billion reais. Lan said July 27 quarterly profit was $60.6 million on revenue of $1 billion. Together, Lan and Tam would be the third-largest airline by market value, after Air China Ltd. and Singapore Airlines Ltd.

“It meets the legal requirements,” Mantega said in a Sept. 2 interview. “If it didn’t, it wouldn’t have been done.”

Tam’s discount shows that investors are overestimating the risk that the deal will fall apart, according to Stacy Steimel, who helps manage $430 million in Latin American stocks at Pinebridge Investments.

“We actually sold our position in Lan and bought Tam right after the announcement,” Steimel said by phone from Santiago. “Tam was more attractive from a valuation point of view. The discount may also be because people are betting that it may take a little longer than planned to go through.”

The companies said Aug. 13 a binding arrangement may come in two to three months, and that the takeover, dependent on approval by regulators and shareholders, will be completed six to nine months after that.

The agreement is “convoluted” and its attempt to meet Brazilian ownership rules is “far from straightforward,” said Arthur Byrnes, chairman of Deltec.

“This is complicated,” he said. “The longer these things take, the more people get worried.”

To contact the reporters on this story: Alexander Cuadros in Sao Paulo at acuadros@bloomberg.net; Eduardo Thomson in Santiago at ethomson1@bloomberg.net

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