Following CADE approval of similar deal with United, Brazilian airline plans to complete Chapter 11 reorganization by February.
Azul has been closely monitoring developments at Brazil’s antitrust authority, the Administrative Council for Economic Defense (CADE), regarding a $200 million capital injection to be made into the airline by U.S. carriers United Airlines and American Airlines. On December 30, the antitrust agency’s General Superintendence (SG) recommended approval of United’s investment in Azul. The matter, however, is still pending deliberation by the authority’s tribunal.
According to sources, Azul has not yet submitted American’s investment to CADE, a step that is expected to be taken only after the completion of the proceedings involving the other partner.
The market and consumer protection bodies are also closely scrutinizing the issue, since Azul was recently involved in talks with shareholders of Abra, the holding company that controls Gol, about a potential combination of forces between the Brazilian airlines.
The discussions sparked a broad debate about consolidation in the airline sector and have spilled over into the talks surrounding the U.S. carriers’ investments in Azul.
The Institute for Research and Studies on Society and Consumption (IPSConsumo) criticized the deal and asked Cade to be included in the case as an interested third party.
Soucres told Valor that Azul chose to submit the agreements to CADE separately. The first to be filed was United’s, which is already a shareholder. With the investment, United’s stake in Azul would rise from 2.02% to about 8%.
After conducting a review under the ordinary procedure, which is more rigorous, the SG approved the deal with United on December 30 and said it saw no competitive risks.
The two U.S. airlines plan to invest $100 million each in the Brazilian carrier.
“The analysis showed that in the city pairs where United is a leader, Azul holds a low market share, and vice versa, which indicates complementarity in the parties’ operations. It should also be noted that the transaction does not constitute a merger or an acquisition of control, and the political rights that United will hold in Azul are quite limited,”
the SG said in its opinion.
Also on the 30th, IPSConsumo filed its objections to the deal with CADE. Juliana Pereira, the institute’s president, said the investment is part of a broader network of investments, financial flows and cross-governance relationships that would increase the competitive risks of the transaction. American Airlines itself is a shareholder in Gol, while United holds a stake in Abra, the holding company of Gol and Avianca. Pereira also said the two investments should be analyzed jointly.
Sources close to CADE, however, said that separating the cases would not be a problem. This is because analyzing a company’s entry into another’s equity capital, as in American’s case, differs from assessing plans by a group to increase its existing stake.
On Thursday (8), CADE President Gustavo Augusto de Lima decided to extend the deadline for analyzing United’s investment to await a new submission from IPSConsumo. As a condition for accepting the institute as an interested third party, Lima set a 15-day deadline for the presentation of documents substantiating the allegations of harm to competition.
Lima told Valor that there is still no decision on whether the third party will be admitted. If it is, the transaction will have to wait for a ruling by the tribunal.
Under the tribunal’s rules, the window for CADE commissioners to raise objections to the SG’s decision closes on the 14th. After that deadline, the SG’s recommendation becomes final. As a result, Lima determined that the conclusion of the case should not occur before the analysis of the request for third-party status.
Azul, American and United declined to comment when contacted by Valor.
Azul shares traded with sharp volatility last week amid progress in its restructuring. On Friday, preferred shares surged 200% to R$75, recovering part of the losses from the previous two sessions. On Tuesday night (6), Azul approved a R$7.44 billion offering through the issuance of more than 1 trillion shares, both common and preferred.
Azul maintains its plan to complete its Chapter 11 process by February. After the share issuance, the priority is now the conversion into equity of the $650 million DIP loan, which carries priority repayment and is expected to be completed in the coming days.
At the same time, Azul is already in talks with investors to raise $1.2 billion in exit financing from Chapter 11. The group has secured funding from investors and partners through a so-called backstop, but the aim is to seek cheaper capital.
Source: Valor International
