Gol Tries Cutting Biggest Debt With IPO for Smiles Unit

(Corrects value in first and third paragraphs, number of shares in third paragraph. Story was published April 24.)

Gol Linhas Aereas Inteligentes SA, the world’s most-indebted airline, is planning to eliminate some of those obligations by raising at least $534 million based on the value of its most-loyal fliers program.

The results of an initial public offering of the Smiles mileage plan, the fifth IPO this year in Brazil, will be announced tomorrow after the close of regular trading. Two of the previous offerings were priced at the low end of estimates, according to data compiled by Bloomberg.

The IPO comes as Gol struggles to fill seats and boost revenue because fewer Brazilians are flying, fuel bills keep rising and its U.S. dollar-denominated debt is coming due. Gol said in a filing this month it’s offering as many as 52.2 million shares for 20.70 reais to 25.80 reais each to reap as much as 1.35 billion reais ($673 million).

“Gol decided to do this now because the company needs money,” said Bianca Faiwichow, an analyst at Gbm Brasil Dtvm in Sao Paulo who rates the stock as market outperform. “Investors know this and that will probably put pressure on the price.”

The Sao Paulo-based carrier’s debt swelled as Brazil’s real weakened 18 percent since the end of 2010, boosting the value of dollar debt. Total debt rose 4 percent to 5.19 billion reais in 2012, of which 1.72 billion reais is short term and due in coming years, according to data compiled by Bloomberg. Gol posted a record 1.51 billion-real loss last year.

Photographer: Dado Galdieri/Bloomberg

The IPO comes as Gol Linhas Aereas Inteligentes SA struggles to fill seats and boost revenue because fewer Brazilians are flying, fuel bills keep rising and its U.S. dollar-denominated debt is coming due. Close

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Photographer: Dado Galdieri/Bloomberg

The IPO comes as Gol Linhas Aereas Inteligentes SA struggles to fill seats and boost revenue because fewer Brazilians are flying, fuel bills keep rising and its U.S. dollar-denominated debt is coming due.

Debt Comparison

Its ratio of net debt to earnings before interest, taxes, depreciation and amortization was 24.6 as of Sept. 30, the latest date for which comparable airline data were available.

About 70 percent of Gol’s debt is denominated in dollars, while 93 percent of its revenue is in reais. Gol’s spending on fuel rose 31 percent in the five years ended in 2012, based on its expense for each seat flown a kilometer.

A spokesman for Gol declined to comment on the Smiles IPO, citing the pending release of first-quarter earnings results next month.

Gol jumped 14 percent through yesterday since Dec. 20, the day before saying it was separating the Smiles plan and weighing an IPO. That beat the 10 percent slide for Brazil’s benchmark Bovespa index. The shares rose 2.7 percent to 13.19 reais at the close in Sao Paulo.

Selling Points

Frequent-flier programs make money by selling miles to banks or hotels to give to customers. Stand-alone operators such as Multiplus SA (MPLU3) can sell points to carriers, banks and retailers, and then buy airline seats and other rewards at a discount, pocketing the difference.

Gol seeks to replicate some of the success of Multiplus, which has more than doubled since Latam Airlines Group SA held the IPO of its unit in 2010. Last year, Sao Paulo-based Multiplus’s sales grew 18 percent to 1.48 billion reais. The company carries no debt.

“Multiplus’s is a solid business,” said Felipe Silveira, an analyst at Coinvalores in Sao Paulo. “Smiles is the biggest competitor to Multiplus in the Brazilian market.”

After posting a rally since 2010, Multiplus plunged 32 percent this year through yesterday, compared with a 4.3 percent decline in the MSCI Emerging Markets Index and an 8.5 percent gain for Montreal-based Aimia Inc. (AIM), the only other publicly traded loyalty program.

Multiplus Drag

Dragging on Multiplus stock were events including Latam’s plans for a secondary offering at the unit, tighter rules at banks such as Itau Unibanco Holding SA for credit-card holders’ award redemptions, and the IPO proposal by Smiles, which has a partnership with state-run Petroleo Brasileiro SA’s gas station unit. The shares rose 0.7 percent to 32.50 reais today.

For Smiles, a pledge by Greenwich, Connecticut-based private-equity firm General Atlantic to invest as much as 400 million reais at a maximum price of 20.70 reais a share, the minimum in the expected range, offers “certainty that there will be demand,” Faiwichow said in a telephone interview.

A press official for General Atlantic at MHP Communications in London declined to comment, as did a press official for Multiplus.

Other IPOs in Brazil in 2013 have been priced at the low end of estimates. Financial software developer Senior Solution SA (SNSL3M) sold shares in March at 11.50 reais, 2 reais less than the bottom estimate. Also at the low end of the range was utility Alupar Investimento SA (ALUP11), which sold stock April 22 at the bottom of its forecast range and started trading today.

Smiles Demand?

High demand may drive Smiles shares above the minimum price, making the stock more expensive, said Matheus Mufarej, an analyst at Victoire Brasil Investimentos, which owns 77,000 shares of Gol, according to data compiled by Bloomberg. It has 2.1 billion reais under management.

“We are not entering the deal because we think the risk is a little high, and the demand exists so the stock won’t be cheap,” he said in a telephone interview from Sao Paulo. “We would prefer to enter Multiplus because it’s cheaper.”

Multiplus traded yesterday at 18 times estimated 2013 earnings, according to data compiled by Bloomberg. Smiles may trade at 19 to 27 times earnings, Faiwichow estimated. Aimia, the largest loyalty program by market value, traded at a ratio of 10.

Smiles has 20 percent of the frequent-flier market in Brazil, while Multiplus controls the rest, Mufarej said.

Gol may be counting on luring loyalty customers by offering more favorable terms. Multiplus buys tickets at a higher price from Latam than Smiles does from Gol, Mufarej said. Smiles miles also are valid longer and Smiles customers can use cash to complement their miles, Faiwichow said.

“The loyalty program business is a solid one,” Coinvalores’s Silveira said. “High consumption over the past few years has resulted in cash flow.”

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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