Delta Air Lines Co. (NYSE: DAL) announced late Thursday that it is acquiring a 20% stake in Santiago, Chile-based Latam Airlines Group S.A. (NYSE: LTM) for $1.9 billion in cash plus an additional $350 million to get the Chilean carrier out from under an alliance with American Airlines Group Inc. (NASDAQ: AAL).
Delta will conduct a public tender offer at $16 a share funded by new debt and cash on hand. The tender price is about 44% above Latam’s closing price on Thursday and a premium of nearly 80% to the airline’s book value.
The U.S. airline also will divest its 9% stake in Brazil’s Gol Linha Aereas Inteligentes S.A. (NYSE: GOL), according to a Bloomberg report, although when and how that will take place was not made clear. Morgan Stanley analysts said that any impact on operations would be modest. Brazil currently accounts for about 30% of Latam’s business.
The deal with Latam is Delta’s largest since merging with Northwest Airlines in 2008 in a deal valued at around $2.6 billion.
American Airlines and Latam were blocked by Chilean courts from executing a joint deal, and in a statement American waved off the impact of the Delta-Latam deal:
Given the recent negative ruling by the Chilean Supreme Court, which would have significantly reduced the benefits of our partnership since Chile was not approved as a part of the potential joint business arrangement, we understand Latam’s decision to partner with a U.S. carrier that isn’t burdened by the ruling.
The Latam deal could make Delta the largest U.S. carrier in Latin America, Bloomberg Intelligence analyst George Ferguson commented. Combined with its 49% stake in Mexico’s Grupo Aeromexico, Delta will challenge American’s leading position in Latin America but is unlikely to unseat its rival, aviation industry analyst Mike Boyd told Reuters: “This is a body blow for American, but not a lethal body blow. It means that Delta will have more access to Latin America than it did before, but American already has much of that in its back pocket.”
In addition to the $2.25 billion price tag, Delta has agreed to purchase four Airbus A350 aircraft from Latam and assume the Chilean airline’s committee to purchase 10 more beginning in 2020.
Latam shares traded up about 29% early in Friday’s session, at $11.64 in a 52-week range of $7.62 to $12.30. The stock’s consensus 12-month price target is $11.32.
Delta traded up about 0.5%, at $59.04 in a 52-week range of $45.08 to $63.44, and the consensus price target is $70.00.
American shares traded up about 0.5% to $27.31, in a 52-week range of $24.23 to $41.96 and with a price target of $37.82.