Sky high

Chile's Sky Airline set to merge with Colombia's Avianca.

The COVID-19 pandemic and the associated travel restrictions have battered the airline industry across the globe, so it is hardly surprising that we are starting to see some M&A activity in the sector.

Public reports of a merger between Chile’s SKY Airline and Colombia’s Avianca entered the public domain last week after SKY Airline’s CEO and owner, Holger Paulmann, publicly agreed to the merger with the Colombian carrier.

Paulmann had been looking for financing solutions for SKY after taking on debt to fund the USD 500 million acquisition of new Airbus A320NEO aircraft just months before lockdowns were implemented. A former fleet manager for SKY confirmed, “SKY has suffered unduly because of the A320NEO leasing agreements it signed that are only profitable when the aircraft is being used extensively.”

“SKY has suffered unduly because of the A320NEO leasing agreements it signed that are only profitable when the aircraft is being used extensively.”

Former fleet manager, SKY airlines

Unsuccessful negotiations were held with Brazil’s GOL and Chile’s JetSmart before Elliott Management and Caoba Capital, who together control Avianca, stepped into the fray. Elliott Management is one of the largest activist investment management firms in the world and Caoba Capital is a private equity firm, based out of El Salvador, Panama and USA with a focus on aviation and aerospace.

Avianca had previously filed for bankruptcy protection in the US and earlier this year, it received approval from the Bankruptcy Court of New York to exit the bankruptcy process in July 2021. Chile’s other airline, LATAM, also filed for bankruptcy protection in the US but SKY was unable to secure similar protection and was forced to find financing solutions elsewhere.

A former legal advisor to SKY commented, “SKY had been looking for a partner or investor for more than seven years, without success, I think their valuation expectations were just too high.” An investment banker in Chile continued, “SKY had been seeking private lines of credit since the summer of 2020, although these efforts were hindered by valuation considerations with estimates ranging wildly, from USD 150 to 600 million.”

“SKY had been looking for a partner or investor for more than seven years, without success, I think their valuation expectations were just too high.”

Former legal advisor to SKY airlines

In the end, Elliot Management and Caoba are set to acquire 40% of the Chilean firm in exchange for an injection of between USD 60 million and USD 70 million, putting the valuation towards the bottom of the USD 150 to 600 million range. SKY will become a subsidiary of Avianca, with Paulmann becoming a shareholder and Board Director of the parent.

The merger between Avianca and SKY creates Latin America’s largest low-cost airline backed by some serious financial muscle and led by a well-respected team. It’s a crowded and competitive industry though: Brazil has two low-cost airlines, Mexico four, Chile two and Argentina two. Could we see more regional consolidations?

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