Merger tests investors’ patience

sao paulo/santiago — When Chile’s Lan airline merged with Brazil’s Tam in 2012, the new group promised “greater value for shareholders.” Three years in, investors are getting impatient.

A stock slump at Latam Airlines Group, the worst performer this decade on the Bloomberg Americas Airlines Index, is quickening in 2015, sending the shares to a sixyear low.

Brazil’s recession this year only adds to the strains on the airline.

“The problem with the Lan-Tam merger is that when they were buying Tam and the Brazilian market, they were buying the biggest country in the region whose economy was growing at a fast pace and with a strong currency,” said David Galante, a senior investment analyst at Banco Penta. That’s “a very different macroeconomic scenario than today.”

Demand in Brazil, particularly for business travel, is weakening and competition from Azul and Avianca Brasil is driving fares down, said Bradford Jones of Sagil Asset Management in London.

“Until demand picks up in Brazil, which we don’t see happening this year, we think there’s down pressure on the shares and on earnings,” said Jones.

Just 22 per cent of analysts recommend buying Latam, compared with 71 per cent in June 2012, according to Bloomberg.

In 2010, when the deal was proposed, Brazil’s economy grew 7.6 per cent. By the time the union was sealed in 2012, GDP had slowed to 1.8 per cent. It’s projected to contract this year for the first time since 2009. Latam is now worth about a third of it was when the merger was completed.

share of analysts who recommend buying Latam shares