Come Fly with Me—to Brazil

08/26/2010 3:50 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

LAN Airlines (NYSE: LFL) will buy Brazil’s TAM (NYSE: TAM) for $3.7 billion, in a deal that will turn Chile’s national airline into a truly South American airline.

Shareholders of LAN will own 70% of the combined company. (TAM will be de-listed, and the new shares for LATAM Airlines will trade in New York; Santiago, Chile; and Sao Paulo, Brazil.)

The acquisition will make LAN, with strong routes and market share in Chile, Peru, Argentina, and Ecuador, a dominant player in the Brazilian market. (TAM had about 42% of the Brazilian domestic market as of the end of the second quarter of 2010.)  TAM’s revenue last year of $4.9 billion was greater than LAN’s revenue of $ 3.7 billion.

I’ve got three reasons to like the deal.

First, rising incomes in Brazil have created a fast-growing market for domestic air travel. The country is so big that air travel is the preferred mode of transportation for many Brazilians, and with rising incomes, more of them act on that preference. (TAM and its competitors have launched innovative financing plans that make it possible for more Brazilians to fly.)

Second, despite its huge market share in Brazil, TAM hasn’t been profitable recently. Combining with LAN will result in an estimated $400 million in annual cost savings for the two airlines.

Third, with the deal, LAN emerges as the most likely candidate for a South American global carrier. By total revenue, the new company, LATAM Airlines, will be the world’s 15th largest carrier (11th by passenger miles) with service to 116 destinations in 23 countries.

I’d like to see the market’s enthusiasm for the deal recede a bit—LAN shares rose almost 8% in Santiago on Friday, August 13—before buying. But this is definitely a stock I’d look to acquire on any dip.

LAN, soon to be LATAM, is a member of my Jubak Picks 50 portfolio.

Full disclosure: I do not own shares of any company mentioned in this post in my personal portfolio.

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