Delta will buy a 3% of stake In GOL Linhas for $100 million and will become a member of its board. The investment, awaiting approval from the board of directors of both companies, will be in the form of American Depositary Shares.
The acquisition will aid Delta to accelerate its presence in Latin America, where it is lagging its peers American Airlines, a subsidiary of AMR Corp. (AMR) and United Continental Holdings Inc. (UAL). Under the terms of the deal, Delta will use its code for GOL flights in Brazil, the Caribbean and South America. In exchange, GOL will use its code for Delta’s flights between Brazil and the US, and from the US to other destinations.
This is the second time the company has invested in a foreign carrier this year to expand its footprint domestically. In August, Delta invested $65 million in the largest Mexican airline, Grupo Aeromexico, which boosted its network capacity in Mexico.
The deal affirms Delta Air Lines’ continued effort to increase domestic and international flights. Within the country, the company is adding various flights in Latin America, Mexico, Brazil and New York through various alliances and partnerships. Delta Air Lines is also progressing on the $1.2 billion expansion of Terminal 4 at New York-JFK, which is scheduled to open in 2013, and the new Maynard H. Jackson Jr. International Terminal in Atlanta, slated to open in 2012. Internationally, Delta’s deal with a Chinese international airline China Eastern in early June should prove profitable.
Coming to GOL Linhas, the move is in line with its long-term strategy to strengthen its capital structure and focus on generating increased returns to its shareholders. Delta’s expertise in the US market provides GOL an opportunity to grow its business with new products and services in the other regions, apart from Brazil.
We believe Delta’s global network, hub structure and alliances with other airlines will enable it to offer customers an improved global reach compared with its peers – United Continental, AMR and Southwest Airlines Co. (LUV).
A month earlier, we upgraded our long-term recommendation on Delta Air Lines from Neutral to Outperform on strong third quarter results and its continued focus on improving and expanding new products and services. The stock retains the Zacks #2 (Buy) Rank for the short term (1–3 months).
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