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The decision by Avianca and Gol shareholders to move forward with the creation of a holding company reinforces the view of analysts and market experts that there are many mergers to come in the industry. The Covid-19 crisis has caused many companies to suffer severe losses and led some, like Latam, to ask for protection from creditors. The situation is now compounded by the skyrocketing price of oil.
The main shareholders of Colombia’s Avianca and the Constantino family, which is the controlling shareholder of Gol, have signed an agreement to create a holding company that will control both airlines and hold a non-controlling stake of 100% of the economic interests in Viva’s operations in Colombia and Peru, as well as a convertible debt investment representing a minority stake in Chile’s Sky Airline. The holding company, called Grupo Abra, will be a UK-based private company. The Constantino family will have the largest stake, sources say.
This is a hot market. Besides the consolidation movements abroad, Latam became the target of competitor Azul, which sought to take advantage of the Chapter 11 plan (judicial recovery) of the Chilean company in the United States and is in talks with creditors to buy the rival. The effort, however, lost steam after Latam’s successful negotiation with creditors, which suggests that Azul’s approaches will not have an effect.
Gol CEO Paulo Kakinoff told Valor recently that mergers and acquisitions are likely to gain steam and cited American Airlines, which bought 5.2% in Gol, as an example. Now, the company has taken a new step.
Avianca Holding was once controlled by businessman German Efromovich, brother of José Efromovich, who owned now extinct Avianca Brasil. The businessman ended up losing control of the company because of an unpaid debt of $456 million with United Airlines. As a result, United emerged as one of the largest shareholders of Avianca before the pandemic and the company’s judicial reorganization.
Avianca completed its reorganization recently and raised $1.7 billion through financing. Shareholders now include Kingsland International Group, Elliott International and South Lake, as well as U.S.-based Delta. It is not clear what role United will play in the new holding company to be created.
On the other hand, Citi analysts pointed out that the agreement between United Airlines and Azul ends on June 26. As Gol has already received an injection from American Airlines, “it will be interesting to see if this business development will increase the urgency for United to reach a similar agreement with Azul,” the bank said. United currently owns about 8% of Azul.
In an earnings conference call this week, Azul executives were asked about talks to expand the agreement with United, but did not provide details. They only said that there is a window to extend the agreement and that there are ongoing talks.
The move by Gol and Avianca still lacks regulatory approval. Yet, sources signaled that there is no concern because the deal is not seen as creating much route overlap – the issue is one of the most sensitive in the analysis of antitrust agencies.
When Azul started approaching Latam, the former showed a strong appetite for consolidation. Behind the scenes, Azul even signaled that if talks with Latam were not successful, it would approach Gol.
In an interview with Valor in the middle of last year, Gol’s chair Constantino de Oliveira Júnior, who will take over as CEO of Abra, emphatically said that “by nature, we place ourselves in the position of consolidators, buyers, and not sellers in this process [of market consolidation].”
In view of the expected success of Latam’s judicial recovery, the group is expected to come out stronger than ever in view of the more favorable negotiations with partners, especially lessors, that Chapter 11 brings. The same happened with American Airlines and Delta, which faced restructuring.
At the end of the day, Azul, which has always signaled interest in consolidation, ended up lagging behind. It remains to be seen how the partnership with United will unfold and if the group has more cards up its sleeve.
Source: Valor International