Client Profile: M&A IR

Gisela Escobar
Director, Investor Relations and Research - LAN Airlines

We hope that our newsletter's readers can learn from some of your experiences with the merger between LAN Airlines S.A. and TAM S.A. To start, could you give them an overview of the deal from an IR perspective?

Sure. Simply put, our task was to clearly explain to shareholders the long-term, strategic rationale for the merger, how it can increase shareholder value. But the deal was a highly complex transaction that took nearly two years to complete. As such, we needed to keep investors focused on the relative simplicity of actually combining the two companies from an operating perspective to deliver the attractive synergies the merger could achieve. In other words, investors could have easily become too focused on the various complexities of executing the deal and thus lost sight of the attractiveness of a combined company that can generate significant value for them. Although it was a complex transaction, the logic of combining the two companies was simple. Our communications with investors focused as much as possible on the latter, so they would focus enough on the merged company's possibilities and not just the complexities of completing the deal.

What was complex about the transaction itself?

The combination of LAN Airlines S.A. and TAM S.A. involved various stages that were completed over a two-year period. While it created a complex ownership structure, the management structure of the combined entity is simple. Again, we endeavored to keep investors focused on the latter. We wanted them to understand that the combined company could be effectively managed, that it wasn't going to be a bureaucratic mess. The deal's other complexities were foreign ownership and control restrictions, differences between legal jurisdictions and, of course, language differences.

Bear in mind, too, that during the two years leading up to the final tender offer, changes were taking place at each company. Concerns about company performance or macro factors, for example, can raise doubts in the minds of investors. This was another reason why we had to try to keep them focused on the long-term opportunities of the merger.

It seems counterintuitive that a company formed by two airlines with operations spread around the world, from two different countries, and having different cultures would have a simple management structure. Such a merger sounds like a textbook case of one that will inevitably fail and one that investors would avoid.

From the beginning and right up until the last TAM shares were tendered, we consistently communicated plans to operate effectively as a coordinated group of companies. LATAM Airlines Group includes different operating companies, and LAN and TAM would continue to operate separately and under two distinct brands. The operations of LAN and TAM are very complementary. LAN Airlines and LAN Peru have leadership positions in Chile and Peru, respectively, as well as other affiliate airlines that have a presence in other countries in the region, while TAM primarily serves Brazil's rapidly growing domestic market. So there was little overlap in the routes of the different companies. Additionally, there was the opportunity to apply LAN Cargo's expertise to the additional network; cargo is particularly important because it makes long-haul flights more profitable. In other words, the association of TAM to the LATAM group of airlines allowed for the creation of a single harmonized network that offers passengers and cargo customers better connections by a world-class Latin American group of airlines.

That's an attractive equity story.

Yes, but as I said earlier, investors could have focused on the complexity of the transaction, projected that complexity onto the operating and administrative aspects of the combined company, and thus could have lost sight of the opportunity and decided against the merger. IR's challenge was to make sure they didn't get too caught up in the technical aspects of the transaction, to keep them focused on the long-term opportunity ahead. Make no mistake about it, though, we had to communicate a lot about the transaction too. There were numerous announcements at each stage as the deal progressed and we received a lot of questions from investors each time.

Could you provide some more detail on the deal's strategic rationale, its expected returns?

The association of TAM to the LATAM group of airlines is about growth and generating future revenue opportunities by providing improved connectivity for passengers travelling within, to and from South America. This is somewhat unique, as most U.S. investors tend to view deals in terms of cost-saving synergies, especially with regard to airline mergers. When we announced the merger of LAN Airlines S.A. and TAM S.A. in August 2010, our initial estimate in annual synergies was $400 million, but in January 2012 that estimate was increased to between $600 and $700 million.

Earlier you referenced winning shareholder approval. What did that entail?

Managing a complex timeline of various actions that had to be coordinated, completed and ultimately communicated to the market over two years. The deal culminated in a 30-day exchange offer period. In the end, it was crucial to get 95 % of TAM's outstanding shares tendered in order for LATAM Airlines to be created. In fact, 96 % of the shares were tendered and the merger was declared legally effective on June 22, 2012.

Part of the complexity was due to the geographic dispersion of shareholders, which were located not just in Chile and Brazil but also North America and Europe. ADRs, for example, were half of TAM's free float. We appointed an information agent to address U.S. shareholders. This also involved identifying some of the LAN and TAM shareholders, because not all of them can be known through regulatory filings. You cannot rely on all shareholders to tender their shares and ADRs before the offering period expires. But in order to contact them you first need to know who they are.

ADRs are another element of complexity with a cross-border deal, given the differences in regulations and securities systems between countries. How did you tackle this aspect of the transaction?

We appointed J.P. Morgan's depositary bank, which was the depositary for TAM's ADR program, as LAN's U.S. Exchange Agent for the merger with TAM S.A. In addition to accepting tenders of over 47 million TAM ADRs into the offer, which had do be done in accordance with applicable U.S., Brazilian and Chilean regulations, J.P. Morgan structured a mechanism to allow non-Brazilian TAM S.A. ordinary shareholders to tender their shares in Brazil and receive LAN ADRs in exchange.

What advice do you have for other investor relations officers, with regard to transaction IR?

Be mindful that arbitrage firms are very important to completing a merger. Under normal circumstances you wouldn't give them too much thought, as these firms are event-driven or exploit near-term market inefficiencies and are not fundamental long-term investors. It is obvious that you will need them to approve the deal along with the other shareholders, but they are important in other ways. Because arbs specialize in transactions and focus on the details of them, they can be an important source of information for an IR department. Arbs can give you insight into what the market is thinking about your deal.

They have their "ears to the ground" and can alert you to market risks that can jeopardize a deal. So it is important to maintain an ongoing dialogue with the arbs. Be as responsive to arbs as you can, in order to develop good relationships with them, because they can be a crucial source of market intelligence.

Many of the arbs we dealt with were located in the U.S. and, in a way, became good partners of our IR department. The insights they shared allowed us to quickly address many of the market risks they saw at various pointsin time.

Any other suggestions?

Yes, be prepared to work many late nights and during weekends!