Azul May Launch an Offer to Buy Latam Brasil in up to 90 Days

Brazilian airline can make a proposal to acquire the domestic operations of Latam Brasil within 90 days.

The idea would be to seek support from the company’s creditors to incorporate this offer in the restructuring plan to be presented by June 30 and voted on by August 23.

The target price of Azul‘s shares was raised from 38.00 reais to 75.00 reais by the end of 2022, giving a potential upside of 66% compared to Friday’s closing. With today’s high, BLUE4 shares are trading at the highest intraday level since the end of February last year.

In analysts’ calculations, the synergies with the potential merger could reach a net present value (NPV) of 9.5 billion reais for Azul, or 19.00 reais per share, assuming that Latam Brasil’s domestic operations are valued at 822 million dollars.

To achieve this result, they relied on synergy gains from eight recent mergers and acquisitions in the sector. According to Mizusaki and Fontana, on average, synergy gains can reach 5% of combined revenues. The floor is 2.7%, which would still imply an addition of 14.00 reais for Azul’s shares, they comment.

They also point out that, to avoid antitrust concerns, Azul may propose to acquire only the domestic operations of Latam Brasil. In addition, as noted in the most recent transactions, they assess that the Administrative Council for Economic Defense (Cade) may require Azul and Latam Brasil to return certain slots at Congonhas and Santos Dumont airports.

Azul would not acquire Latam Brasil’s international operations, as Brazil-US routes could raise concerns about market concentration, as Delta Airlines owns 20% of Latam Group and United Airlines owns 8% of Azul”, they argue.

In the report, they also revised upwards the recommendation of Latam’s American Depositary Receipts (ADRs) traded on the New York over-the-counter market from underperform (equivalent to selling) to neutral. The target price was raised from US$1.00 to US$3.00.