Azul Airlines: Founder Faces Minority Discontent after TAP Share Sale Agreement

RIO DE JANEIRO, BRAZIL – Airline owner and founder David Neeleman, creator and owner of Azul, is now better able to move on to his next venture back in the United States – the new low-cost airline called Breeze Airways.

After halving his economic stake in Azul from six percent to three percent, and freeing himself of a US$30 million (R$150 million) personal debt, he has now sold his shares in the consortium that controlled Portuguese airline TAP, the Atlantic Gateway, and received €44 million from the Portuguese government.

But in order to finalize the deal in Portugal, he will need to face Azul’s minority shareholders. Neeleman is the company’s controlling shareholder, with 67 percent of the common stock, but was left with only three percent of the total capital, given that each of the company’s preferred shares is equivalent to 75 common shares in dividend distributions and his position in this class was reduced from 11.4 million to 2.1 million shares after a bond enforcement action by creditors in April.

The negotiation with the Portuguese government will trigger a new loss for Azul, now at R$143 million, after the R$618.5 million already reported in the first quarter. Accordingly, the year’s loss so far amounts to R$761 million. The transaction terms will be taken to the Brazilian company’s shareholders’ meeting with the vote of the preferred shareholder – that is, despite being owner of the political power in the company, Neeleman will not be able to impose his will on the other shareholders. The meeting is scheduled for August 10th.

Despite Neeleman being known as a bold and successful entrepreneur, the joint venture with TAP has not yielded good results to Azul. At least not in terms of its balance sheet, although the commercial partnership has strategic value.

The new losses are the result of an agreement between Neeleman and the Portuguese government to rescue TAP by injecting €1.2 billion into the airline.

To enter into the transaction, Portugal’s government effectively re-nationalized the company, and paid the holding Atlantic Gateway, controlled by Neeleman, €55 million – €10.6 million to Azul and €44.4 million to the entrepreneur – for its 45.5 percent controlling stake in TAP’s equity. As a result, the Portuguese government will hold over 70 percent of the company.

Neeleman had acquired TAP in 2015, as part of the company’s privatization process. The following year, Azul, which he had founded in 2008, bought a US$90 million convertible bond issue by the Portuguese company, which contained the right to convert the debt into an equity stake of 41.25 percent from 2026 on. Last year, Azul also acquired a share in the consortium in which Neeleman had a stake, becoming a shareholder of TAP in partnership with its controller.

As part of the settlement with the Portuguese government, in addition to selling its shares in TAP, Azul will give up the right to convert the bond debt into capital, without receiving anything for this right, which has prompted criticism of Neeleman by other investors in the Brazilian airline.

Some believe that, rather than attach value to his shareholding, the entrepreneur should have negotiated the repurchase, at least partially, of the bonds held by Azul and thus attract more cash to the company rather than for himself. But whether this is really a problem or simply a one-off complaint, will only become clear at the August meeting.

Due to currency appreciation, the bonds, considering the interest, will be marked in the next quarter’s balance sheet at R$729 million – against R$670 million in the first quarter. The total value of bonds, when including the conversion of securities into shares, was booked at R$824 million in the March balance. When settling with Portugal, there will be a loss of R$95 million due to the loss of convertibility. Part of this impact will be offset by the R$59 million gain from the euro’s appreciation.

The main Brazilian company’s main argument, as proposed to the shareholders and submitted to the Brazilian Securities Commission (CVM), is that the capitalization of TAP will provide greater security to the prospect of receiving the bonds on maturity – which continue to have the same seniority position (with guaranteed revenue from the fidelity program) and income of 7.5 percent per year.

In addition to the decrease in debt bonds, there will be a loss of R$48 million with the equity position sold, since it has been transferred for R$65 million and is booked in the March balance sheet at R$115 million.

After going public in Brazil’s B3 stock market, Neeleman, who began his career in the sector with a company called Morris and then gained projection with JetBlue, was revered by investors, and his company held a substantial premium over Gol. The market’s perception was that Azul had greater growth prospects, with its plan to operate and open regional routes, while the Constantino family’s company was already mature and operated routes of lesser return for the major competition. In the B3, Azul is currently valued at R$7.14 billion, while Gol is worth R$6.91 billion.

Since he allowed himself to be foreclosed by creditor banks, reducing his equity share in Azul, Neeleman has lost a relevant part of his brilliance. The understanding is that he will be increasingly dedicated to Breeze, which will reach the market at the right time. With a low-cost model, the company should debut well when the industry will be flooded with aircraft at reduced prices due to the pandemic. Although due to completely adverse circumstances, the entrepreneur’s exposure to other companies – which are facing hardship – has dropped significantly with the crisis.

For Azul, the relief is expected to come from an impending funding announcement, within the model developed by Brazil’s BNDES (National Bank for Economic and Social Development), which may raise up to R$2 billion. The state-owned bank will provide the impetus that the company was unable to draw from its negotiation with TAP.

Source: Exame