October 15, 2018 / 11:29 AM / a month ago

UPDATE 4-Gol buyout plan wipes 39 pct off Smiles market cap, prompts Brazil inquiry

(Recasts with regulatory inquiry, comments from executives and fund managers, details of proposal)

By Marcelo Rochabrun and Paula Laier

SAO PAULO, Oct 15 (Reuters) - Brazilian airline Gol Linhas Aéreas Inteligentes SA on Monday announced a plan to buy out minority shareholders in its loyalty program Smiles Fidelidade SA for an undisclosed price, battering the unit’s shares and prompting regulatory scrutiny.

Gol said the plan was aimed at cutting costs, improving corporate governance, and removing the pressure of unrealistic analyst forecasts from the loyalty program, in which Brazil’s biggest domestic carrier still holds a 53 percent stake.

But the lack of a buyout price in the announcement, and concerns that Gol could force the deal through over resistance from minority investors, sent Smiles shares diving 39 percent. That wiped out nearly 2.5 billion reais ($669 million) of market capitalization in the session.

“While this might sound like bad news, the reality is we are coming to the table to negotiate a fair deal for everyone,” Gol’s Chief Financial Officer Richard Lark told investors on a conference call.

Brazilian securities regulator CVM opened a formal analysis of the proposal, the agency said after markets closed on Monday.

Gol’s move to delist Smiles, just five years after joining a wave of loyalty program IPOs, followed a similar decision by rival Latam Airlines Group SA this year to take miles plan Multiplus private, citing competitive pressures.

However, in announcing its intentions, Chile-based Latam offered a nearly 12 percent premium for Multiplus shares, sending the stock higher on the day of the news.

Gol said it had asked Smiles to set up “an independent special committee” with which it would negotiate the terms of the transaction to then be submitted “where applicable” to shareholders of Gol and Smiles.

The airline also announced that its operational contracts with the loyalty program will not be renewed in 2032.

Itaú BBA analysts said in a note that the announcement was negative news for Smiles shareholders. As recently as Sept. 20, Itau BBA had said it saw a “low probability” of Gol failing to renew its contract with Smiles.

MINORITY RAPPORT

Last year, Air Canada, which had sold its Aeroplan loyalty program to data analytics firm Aimia Inc, said it would not renew its operating agreement with the company, hammering Aimia shares. The airline eventually partnered with Visa on an offer to buy back Aeroplan.

In the case of Smiles, however, fund managers told Reuters that Gol could try to use its role as controlling shareholder of the loyalty program to push a deal through, leaving minority shareholders with little recourse. The investors requested anonymity due to the sensitivity of upcoming negotiations.

“I want to make it very clear that the public tender offer is not our goal,” said Gol Chief Executive Paulo Kakinoff.

Gol said the buyout and related restructuring would pave the way for the airline to migrate its shares to the Novo Mercado segment of the São Paulo stock exchange, which requires higher standards of corporate governance.

Delta Air Lines Inc has a 9.0 percent stake in Gol, which has been particularly hard hit among Latin American airlines this year by the poor performance of local currencies, which account for the bulk of its revenue.

At its peak, Smiles stock more than tripled from its 2013 IPO and 11 out of 12 analysts recommended it as of September, according to Refinitiv data.

Gol CFO Lark said analysts had created undue expectations for the financial success of Smiles which was one reason for the proposed restructuring.

Lark said that many research notes on Smiles assumed its revenue would continue to grow by double digits annually.

“That happened for a while but we don’t think it can continue in the future,” Lark said.

$1 = 3.7379 reais Reporting by Marcelo Rochabrun and Paula Laier; Additional reporting by Bruno Federowski, Raquel Stenzel and Paula Laier Editing by Brad Haynes and Grant McCool

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