Smiles shareholders’ meeting approves the merger into its parent GOL airlines

RIO DE JANEIRO, BRAZIL – After two bid raises in just one day, Smiles (SMLS3) shareholders approved on Wednesday, March 24th, a corporate reorganization that, once implemented, will result in the migration of the shareholder base of the loyalty network company to the airline Gol, its parent company.

The terms of the exchange are equivalent to R$27 per share of the loyalty network company, with two options for the company’s shareholders. The first is made up of a cash portion of R$9.14 per share and 0.6601 of Gol’s preferred stock. The second involves R$22.54 in cash and 0.1650 of the airline’s preferred stock.

The offer was raised twice on Wednesday alone: on Wednesday morning, the proposal had been raised to the equivalent of R$26.14 per SMILES share. After the close, Gol raised the offer again, to the equivalent of R$27. It is worth noting that SMLS3 shares rose 8.80%, to R$24.85, on Wednesday, amid the changes in the terms of exchange.

Gol had been raising the proposal for the merger of Smiles amid resistance from minority shareholders to join the exchange ratio offered by the company.

Earlier this week, Esh Capital, which, through the Samba Theta fund, owns about 1.54% of the common shares of Smiles, released a public letter criticizing the proposal and said that the fair value to be paid per share would be R$44.94, according to a study done by Meden Consultoria, hired by Esh.

The value found by the consulting company took into consideration the discounted cash flow method and criteria, while Gol’s proposal was based on market value. According to Esh, the methodology used by the airline would not capture any of the future benefits agreed to in the credit acquisition operations.

It also criticized Gol’s advance purchases of tickets made with Smiles funds. In the group’s view, this would be a “financial bailout” during the pandemic.

Brunno Donadio, analyst at Equitas, said that the elevations of the proposals signaled Gol’s fear of not getting approval to reincorporate Smiles. “They want to put Smiles back in to access its cash, stop transferring so much value to Smiles’ shareholder and resolve the tax issue. The contract between them, as it stands today, is very good for Smiles shareholders and bad for Gol shareholders”, he says.

On the tax issue, the analyst clarifies that, as Gol’s operation generates losses and Smiles’ generates profit, with the companies separated, the profit of one cannot be offset by losses of the other.

According to Goldman Sachs, the migration of the shareholder base from Smiles to Gol can simplify corporate governance and provide synergies for operations and flexibility in product development and offerings.

With the deal now approved, Gol will need to raise up to R$1.326 billion to finance the cash portion of this transaction, Bradesco BBI says. The company recently said that US$300 million of unencumbered assets can be used for this transaction. Analysts have a neutral recommendation for GOLL4, with a target price of R$23. The recommendation is also neutral for Smiles, with a target price of R$25.

With the approved merger, an attempt of more than a year by Gol to make the reorganization comes to an end. The first proposal was submitted in December 2019 and was unsuccessful.

Source: Infomoney