How the merger of two airlines shows us how to invest

The two largest airlines in Latin America on Friday surprised investors by announcing

plans to create a regional giant to compete with major airlines worldwide.According to a memorandum of understanding signed on Friday, the Chilean airline LAN Airlines SA launched a tender offer to purchase the shares of TAM, and offer its own shares.

The airline said that the combined revenue of both companies in 2009 were U.S. $ 8,500 million, which completed the deal, would among the 15 biggest airlines in the world, along with rivals such as Cathay Pacific Airlines and Singapore Airlines Ltd. Ltd. The companies said each share will be exchanged for 0.9 TAM action of LAN Airlines, and the Chilean company will be renamed LATAM Airlines. Shares of TAM and ADR will be removed from bag.

In a complex transaction that is definitely above the realms of online investing for dummies, suffice it to say that TAM will effectively become a subsidiary of LAN, although TAM existing controlling shareholders will retain their 80% share of the voting shares of the company, which will also retain its own structure.

This structure meets the requirements of Brazilian law that prevents foreigners owning more than 20% of a Brazilian airline. The deal also is subject to the approval of 95% of the shareholders of TAM."It caught everyone by surprise, but definitely will be a good deal," said Fernando Borges, an analyst at M Safra & Co., in So Paulo. "Now is the question on the synergies, in terms of operations as well as the complementary nature of its business, the LAN is strong in [transport] TAM cargo and is strong in [transport] passengers]. And we can imagine that will have economies of scale, more bargaining power. "

The two airlines said that the union would generate annual savings of $ 400 million. Analysts said the figure would have been greater if LAN have been able to make a full acquisition.

TAM's shares rose on Friday in the Brazilian stock exchange Bovespa 27.6% to close at 36.20 reais (U.S. $ 20.45) on the news.

At current prices of the action, the new company will be worth about U.S. $ 11,500 million.

Investing for dummies online traders can see that the combination will create a pan-regional force that will threaten the healthy yields and profits of American Airlines, the largest player in the north-south routes, and others in the region. American, a subsidiary of AMR Corp. (AMR), did not comment immediately.

Meanwhile, the merger of the Tam Airlines, Brazil, and Lan Chile, may require more changes in global alliances. Tam recently joined Star Alliance headed by Lufthansa and United, while Lan is a former member of the Oneworld alliance led by American Airlines and British Airways. The merged company will probably have to choose one of two or even drop out and join SkyTeam, the third alliance led by Delta and Air France-KLM, which has been trying to increase its presence in the region

How the merger of two airlines shows us how to invest

By: Owen

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