Is GOL's Secondary Offering Sensible? (GOL)

A couple readers and associates have asked me recently about Gol Linhas Aereas Inteligentes (GOL) in the wake of their secondary offering, recently announced, that has punished the company's shares.

As a long-term investor, what's my take? Seems pretty sensible to me. It's true that we're going to see some dilution here. The grand total is about 4.4 million new shares, on a base of about 200 million.

A major shareholder, ASAS Investment, is also registering to sell 10 million shares -- but those shares already exist, they're just going to add to the float and perhaps create some selling pressure until they're absorbed into the marketplace. No dilution from those.

So in the end, we're talking about dilution of about 2% from the new offering.

Not a big deal in the grand scheme of things, though they're also offering up some debt, which they have generally shyed away from . However, this is convertible debt, and I'm guessing that with their share performance over the past year they're going to get great terms on this issue.

What it amounts to, basically, is some cheap money for GOL's coffers, at the cost of a bit of dilution for current shareholders. Dilution can often be bad, of course, if companies are diluting just to pay stock options (good 'ol Cisco), or selling stock because they can't make money by selling their products.

But with a very successful company like this, which is still in hyper growth mode, they need a way to expand faster than their operating cash flow alone can provide. That's especially true in light of the situation in Brazil, which has opened up the potential for GOL and (TAM) to fight over Varig's declining market share -- now is certainly the time to take advantage. New planes are expensive, and GOL has also recently announced a significant ramp-up in it's fleet growth plans, which means an additional two new planes added this year, and ten additional ones next year.

The upshot for GOL is that 2006 will be a bit more expensive in terms of capital outlays, and that 2007 will be a year of dramatic growth in the fleet, with most of that coming from purchased high-efficiency Boeing 737-800s and 700s (they're buying 13 next year and leasing one).

With the performance we've seen from GOL, and their general shareholder-friendliness (the company is largely owned by a Brazilian family, so they're diluting themselves as well), I'm happy to see them using a variety of relatively low-cost financing options to pay for their major fleet expansion. The secondary doesn't bother me in this case, though with my large GOL holdings the associated swoon in the shares isn't enough to get me to further overweight this position.

GOL 1-yr chart: