Delta Air Lines, Inc. (DAL - Free Report) has entered into a contract with LATAM Airlines Group (LTM - Free Report) to buy a 20% stake in the latter for $1.9 billion. This is the carrier’s largest deal since its merger with Northwest Airlines a decade ago. This pact with Latin America's largest carrier will strengthen Delta’s footprint in the region including cities in Argentina, Peru and Brazil, which are currently served by LATAM.
Delta aims to grow internationally by inking deals with foreign airlines. To this end, the carrier already has partnerships with Virgin Atlantic Airways Ltd., Air France-KLM, Korean Air Lines Co. and Grupo Aeromexico SAB. Lately, the carrier is said to be negotiating a 10% stake in Alitalia.
As part of the partnership, the Atlanta, GA-based airline will also invest $350 million in aiding LATAM’s transition from Oneworld to join Delta’s network. The contract is also a step forward for Delta’s fleet transformation initiatives as the carrier will acquire four A350 aircraft from LATAM and purchase 10 additional A350 aircraft (complying with LATAM’s commitment), which are to be delivered between 2020 and 2025, per the terms of the agreement. Further, Delta will get a representation on LATAM’s board.
The carrier anticipates the deal to be accretive to its earnings over the next two years. Moreover, this heavyweight contract is expected to boost revenues by $1 billion in five years. Additionally, Delta does not expect the transaction to affect its free cash flow and therefore its commitments to add shareholder value. The transaction is also not expected to weigh on its targeted leverage ratios.
Following this new deal, the carrier plans to sell off its 9% stake in Gol Linhas Aereas Inteligentes SA (GOL - Free Report) , which completes with LATAM.
As news of the deal broke, LATAM’s shares jumped more than 44% in after-hours trading on Sep 26. The company anticipates the transaction to enhance its capital structure and free cash flow as well as reduce its expected debt in excess of $2 billion by 2025.
American Airlines’ Contract Loss
Delta’s LATAM deal follows as American Airlines Group (AAL - Free Report) fails to win approval for an agreement that would have deepened its ties with LATAM.
American Airlines, which currently has the biggest presence in Latin America among the other U.S. carriers, has been trying to strengthen its partnership with LATAM for gaining an even larger foothold in the region. However, last May, the Supreme Court of Chile rejected the deal as that would have affected competition. Meanwhile, the carrier does not see this contract loss as a major financial burden.
As for Delta, the deal is pending governmental and regulatory approvals. However, the carrier is hopeful of getting the deal through without regulatory roadblocks.
Delta carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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