Schmacko (96.99)

LFL and TAM potential merger and possible arbitrage...

July 06, 2011 – Comments (0) | RELATED TICKERS: LFL , TAM

This is going to be shortish.

For those that don't follow Latin American stocks.  Chile's Lan Airlines (LFL) is in the process of trying to merge with Brazil's TAM Airlines (TAM) to form a South American super airline.  Holders of TAM will receive .9 shares of LFL in exchange and the company will change it's name to something more glorious, etc.   Both of these securities are ADRs that trade at 1:1 ratios with the underlying shares of stock from their home exchanges.  LFL is up 9.73% over the last week and TAM is up 12.87%.  That being said a share of TAM still trades at a 14.7% discount to the .9 shares of LFL that one will receive in the merger.  So this is a play on TAM.  This is a stock deal and not a cash one, so the risk is that LFL shares will go down before the merger happens, which is currently specualted to be done by March 2012 after Lan clears a few more regulatory hurdles.  The deal's going to happen and I expect LFL to spike when the last of the regulation is cleared.  Both airline's ADRs have traditionally strong 4th quarters.  TAM also is mulling over the idea of spinning off it's maitenance unit in an IPO, which I'm sure will also keep the ADR brice bouyed. 

I currently own LFL shares and am seriously considering picking up some TAM in the next few days.