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Azul Backs Off Latam Takeover After Reorganization Plan Drops

Edward Russell

November 29th, 2021 at 1:26 PM EST

Azul has dropped plans to take over Latam Airlines Group and ended its ambitions to create another giant South American airline. The move came two days after Latam filed a standalone reorganization plan with a U.S. bankruptcy court that is backed by its largest shareholders.

The difference was — it appears — in the numbers. Azul’s non-binding proposal, which Latam acknowledged receiving on November 11, included $5 billion in equity financing plus $4 billion in merger synergies, whereas Latam’s plan includes nearly double the amount of new equity: $10.5 billion split between $9.7 billion in new convertible notes and an $800 million issue of new shares.

“Azul will continue to focus on its exclusive competitive advantages,” the Brazilian carrier said on November 28. It added that it will continue to “evaluate future partnerships and consolidation opportunities.”

The combo, had it occurred, would have been among the largest in South America. It would have greatly eclipsed Gol’s acquisition of Brazilian regional carrier Map Transportes Aéreos, and surpassed the potential merger of Avianca and Chile’s Sky Airline. It would not have been the first for Latam: The airline itself was created through the merger of Lan Airlines and Tam Airlines in 2012.

Latam filed its reorganization plan with the U.S. Bankruptcy Court for the Southern District of New York late on November 26. Backed by major shareholders, the Cueto family, Delta Air Lines, and Qatar Airways, the proposal would see the airline exit its Chapter 11 restructuring with $2.67 billion in liquidity and roughly $7.26 billion in outstanding debt — a 35 percent reduction in its long-term obligations compared to when it filed for bankruptcy in May 2020. The Cuetos, Delta, and Qatar would all receive new equity in the restructured carrier through backstopping nearly $1.4 billion of the new convertible notes.

Roberto Alvo, CEO of Latam, in a statement called the plan a “critical milestone” in the airline’s restructuring.

Investors reacted negatively to the plan, which would see existing Latam shares make up just 0.1 percent of the new capital structure. On Monday, Latam’s stock was down more than 43 percent from opening to 530 Chilean pesos ($0.63) a share in trading as of 2:40 p.m. local time in Santiago.

Latam did not outline any major changes to its commercial strategy in the plan. The airline plans to maintain and grow its domestic entities in Brazil, Chile, Colombia, Ecuador, and Peru — it closed its Argentina subsidiary early in its restructuring — and its position as South America’s leading global carrier. In addition, Latam continues to push forward with its proposed joint venture with Delta covering flights between the U.S. and South America. Only U.S. authorities need to sign off on the pact that would allow the two airlines to coordinate on schedules and other commercial initiatives.

This differs from other airlines restructuring under Chapter 11. Avianca outlined plans to add seats to its narrowbody jets and launch more point-to-point routes in an effort to better compete with low-cost competitors in its plan that was approved in November. And Aeromexico aims to boost connectivity over its Mexico City hub and leverage its joint venture with Delta to achieve more synergies under its plan that was filed in October.

While Latam’s plan focuses on creditors and shareholders, the airline has achieved savings through Chapter 11. It cut labor costs by roughly 44 percent, with a headcount reduction of 14,300 employees to 28,700 staff. And Latam streamlined its fleet by returning 42 aircraft — including all of its Airbus A350s — while renegotiating commitments with both Airbus and Boeing. The airline has firm orders for 70 Airbus A320neo-family jets, and two Boeing 787-9s. Latam operated 302 aircraft at the end of September.

Latam plans to hold a shareholder meeting on the plan in late December with an initial U.S. court hearing tentatively scheduled for January 27, 2022. A confirmation hearing could occur in March and, if approved, the carrier would aim to exit bankruptcy protection by the end of June.

Edward Russell

November 29th, 2021 at 1:26 PM EST

Photo credit: A Latam Airlines Airbus A320. Latam Airlines Brasil

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