Gol Weighing IPO for Smiles Seeks Bounce Like Multiplus

Dec. 21 (Bloomberg) --- Multiplus SA (MPLU3), the frequent-flier program spun off from airline Tam SA, is blazing a trail that Gol Linhas Aereas Inteligentes SA (GOLL4) seeks to follow by selling stock of its Smiles mileage unit to pay down debt.

Multiplus has paid more than 1 billion reais ($483 million) in dividends since its 2010 initial public offering, a boon for its former parent, which holds a 73 percent stake. Its dividend yield exceeds that of all its consumer-services peers in Latin America except Argentina’s Grupo Clarin SA.

The market value of Sao Paulo-based Multiplus surged past Tam’s before the carrier agreed this year to combine with Lan Airlines SA (LAN) to form Latam Airlines Group SA. A successful IPO for Smiles in 2013 could provide a boost to Gol as the airline tries to end losses.

“Smiles is taking these steps, and an IPO could unlock the value for Gol,” said Felipe Silveira, a Sao Paulo-based analyst at Coinvalores who rates the shares as hold and doesn’t own any. “Once you separate the price it’s easier to see how much this asset will add to the company as a whole. Then you can improve the value of the mother company.”

Gol, the world’s most indebted airline, has cut flights and jobs as it faces rising fuel costs and currency fluctuations that have helped trigger adjusted losses in five of the past six quarters. Sao Paulo-based Gol plans to operate Smiles as a separate company in 2013 ahead of a share sale.

‘Growing Market’

“We are optimistic,” Flavio Vargas, the director of Smiles, said at Gol’s investors day on Dec. 6. “We see a growing market.”

Gol’s shares slumped 9.6 percent this year through yesterday, compared with a 30 percent gain for the Bloomberg Americas Airlines Index (BUSAIRLX) of nine carriers. Gol didn’t respond to a request for comment on this story.

Gol rose 0.3 percent to 11.22 reais at 11:05 a.m. Multiplus fell 0.4 percent to 48.70 reais.

Airline rewards programs make money by selling miles to banks or hotels to give to customers. Stand-alone operators can sell points to carriers, banks and retailers, and then buy airline seats and other rewards at a discount, pocketing the difference.

Multiplus reaped 723.9 million reais, a third less than analysts projected, in its 2010 IPO for Tam. Before the IPO, the company struck a deal with Ultrapar Participacoes SA (UGPA3)’s Ipiranga- brand gas stations to show that its product had value beyond its roots as Tam’s mileage program.

Revenue Outlook

Revenue will be about 500 million reais this quarter, Multiplus Chief Executive Officer Eduardo Gouveia said in a Dec. 19 interview. That would exceed the average estimate of 450.5 million reais from four analysts in a Bloomberg survey. The shares soared 52 percent this year through yesterday.

“Oftentimes, when you spin this thing off and you have this independent entity that is entrepreneurial-minded and freed from the parent, amazing things can happen,” said Jay Sorensen, who helped run the frequent-flier program at the former Midwest Airlines and is now president of consultant IdeaWorks Inc. in Shorewood, Wisconsin. “They can really go out and engage in different brands and create something that is even more robust for the consumer.”

Multiplus has 10.5 million clients, about the same number as U.S. carrier JetBlue Airways Corp. (JBLU), according to Colorado Springs, Colorado-based industry researcher Frequent Flyer Services.

‘Very Big’

Brazil is still a market that offers growth in terms of participation -- it could be very big,” Gouveia said at the company’s Sao Paulo headquarters.

Its pool of potential customers should expand, buoyed by projected growth of 3 percent in Brazil’s gross domestic product in 2013, rising household wealth and greater access to financial products for low-income Brazilians, Aloisio Lemos, an analyst at Agora Investimentos, said in a telephone interview from Sao Paulo.

In 2007, some investors in American Airlines parent AMR Corp. (AAMRQ) urged the company to sell its AAdvantage frequent-flier plan, saying the program was worth as much as the carrier, at the time the world’s largest. AMR kept its loyalty program and filed for bankruptcy last year as losses mounted.

Air Canada’s former parent, ACE Aviation Holdings Inc., opted to go the IPO route for its rewards program in 2005. The Montreal-based loyalty plan, now known as Aimia Inc., was the inspiration for Multiplus, which was designed to be a sleeker and more agile company than Tam, Gouveia said.

Capital spending equaled 0.05 percent of sales last year, compared with the median of 6.1 percent for Brazil’s largest 177 companies, according to data compiled by Bloomberg.

“We are a company that has a very low capex because our capex is in technology,” Gouveia said. “We have no stock, no stores and high cash flow and good profitability.”

Multiplus is working to convince Brazilians that the points are valuable and help them figure out how to navigate Multiplus’s plan, which has partnerships with more than 230 companies.

“This looks like -- to this gringo -- like a very complex offer that I’m just curious whether people grasp,” said Sorensen, the consultant. “I look at this and think: ‘Boy, this really seems like an amazing story.’”

To contact the reporter on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net

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