Brazil’s Gol Airline Beckons Foreign Buyers After Vote: Real M&A

Brazil’s biggest airline is opening the door to a potential suitor with a stock restructuring that will allow greater foreign ownership.

Shareholders of Gol Linhas Aereas Inteligentes SA voted Monday to approve a measure that will reduce its dependence on the controlling Constantino family. Non-voting shareholders also gained the ability to hold board seats. That may increase Gol’s appeal to investors from abroad or even lead to an eventual takeover of the $830 million carrier, among the cheapest in the Americas.

Brazil’s airlines resemble U.S. carriers a decade ago, before a recession and high fuel prices forced consolidation and cost cuts, said Rob Pickels, an analyst and portfolio manager at Manning & Napier. Gol and the rest of the Brazilian industry will go through a similar process that will leave it more financially sound, he said.

“Consolidation was essential for U.S. companies to return to profit, and with competition increasing in Latin America, partnerships will be natural,” said Rodrigo Fernandes an analyst at UBS AG in Sao Paulo.

Delta Air Lines Inc., the world’s third-biggest carrier, already has a 2.9 percent stake in Sao Paulo-based Gol and a seat on the board. It would make sense for Delta to increase its investment, Fernandes said in an interview. Other contenders for a stake over time include Panama-based Avianca Holdings SA and Copa Holdings SA, according to Raymond James Financial Inc.

Industry Precedent

Gol’s restructuring mimics a similar move by Tam Linhas Aereas SA in 2010 that allowed Chile’s Lan Airlines SA to acquire it, while still technically abiding by Brazilian laws restricting foreign ownership of airlines. The transaction created the largest carrier in Latin America, putting pressure on rivals to compete.

“This helps us to be more competitive,” Gol Chief Financial Officer Edmar Lopes said Monday after the vote in Sao Paulo. “It’s important to have flexibility in the long-run, but right now there’s nothing happening.”

At Gol, the stock restructuring will “pave the way for accretive capitalizations and M&A such as Delta,” said a team of Banco BTG Pactual analysts led by Renato Mimica in a Jan. 22 note.

Cheap Stock

A buyer could take advantage of Gol’s current low price and valuation. The company’s non-voting preferred shares fell 39 percent this year through Monday and its American depositary receipts slumped 49 percent. Gol dropped 4.3 percent to 8.85 reais in Sao Paulo Tuesday after Chief Executive Officer Paulo Kakinoff said the airline is selling some fares below costs.

The stock declines are a reflection of the Brazilian economy rather than the company itself, said Savanthi Syth, an analyst for Raymond James in St. Petersburg, Florida.

Gol has gotten so inexpensive, the airline’s equity is worth less than the value of the carrier’s 54 percent stake in its loyalty program, Smiles SA. The carrier is the fourth-cheapest among peers in the Americas, based on a ratio of enterprise value to earnings before interest, taxes, depreciation and amortization during the past 12 months, according to data compiled by Bloomberg.

“If you look at the company’s operations, if you price in what Gol has done with its operating margin and continually increasing revenue per passenger, it should be trading at a higher value,” Fernandes at UBS said.

Gol would benefit from more foreign partnerships similar to the ones it has now with Delta and Air France-KLM. The alliances let passengers book tickets on each other’s flights, increasing Gol’s access to U.S. dollars. It needs the U.S. currency to service debt and pay for fuel, while the bulk of its revenue comes from local currency.

Dollar Revenue

“The company needs more revenue in dollars than it has today to better equate its currency exposure,” UBS’s Fernandes said. “It’s hard to balance that without a partner.”

A tie-up would also help thwart competition that’s mounting in Gol’s backyard. The carrier is facing increasing pressure at home from JetBlue Airways Corp. founder David Neeleman’s Azul SA and Avianca Brasil, which is owned by the buyout group led by Brazilian investor German Efromovich.

Some recent Delta comments suggest a Gol purchase isn’t imminent. On March 3, Delta President Ed Bastian noted the overcapacity in Brazil’s airline industry and the country’s economic problems in a talk with investors in New York. Delta probably will slow its growth in the country for now, he said at the JPMorgan transportation conference.

Delta needs “to take a little bit of a breath, and we’re doing that with our business as well as with our partner, Gol, down in Brazil,” Bastian said.

On Monday, a spokeswoman for Atlanta-based Delta referred any questions related to Gol to the Brazilian carrier.

Pros, Cons

It’s not clear what more Delta can get out of a buyout or major purchase of Gol’s stock, said Bob McAdoo, an analyst with Imperial Capital LLC in Los Angeles. While not altogether ruling out an acquisition, McAdoo said Delta already benefits from connecting traffic from Gol for flights to the U.S. Also, Delta might have to report Gol’s losses in its own financial statements if it bought the airline.

Still, Gol has worked to narrow losses, and revenue has increased. And should Brazil’s airline industry transform itself the way U.S. carriers did, the outlook could be bright.

After racking up $58 billion in losses from 2001 through 2009, U.S. airlines consolidated into a handful of profitable survivors. The remaining carriers are much better investments after they combined, slashed capacity and added ancillary revenue, Pickels of Manning & Napier said. The four major U.S. carriers reported record profits in 2014.

“The industry is a little like the Wild West in Brazil,” said Pickels, whose Fairport, New York-based firm held about 3.9 million Gol ADRs as of December, according to data compiled by Bloomberg. “There is enormous potential.”

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