Gol Airlines: Well-Positioned For Reopening Following Latest Codeshare Agreement

Summary

• Gol Airlines will expand its commercial cooperation with American Airlines Group through an exclusive codeshare agreement for the next three years.
• Alongside the clear strategic benefits from the agreement, the $200 million investment by American also comes at a steep premium, validating the equity value.
• Gol remains a compelling post-COVID-19 reopening play heading into a potential volume rebound towards year-end.

Melina Massola/iStock Editorial via Getty Images

Investors are likely to view the recent codeshare announcement as a major positive for Gol Airlines (NYSE:GOL) - it represents a significant vote of confidence by American Airlines (AAL) in Gol's future, while the hefty premium paid should also improve investor perception of the equity. While the equity raise also entails a modest reduction in leverage levels, I think the key takeaway for the balance sheet is that American could be a source of additional financial support for Gol (if needed) going forward. As such, I continue to see Gol as a compelling post-COVID-19 reopening play, with an appealing valuation likely underestimating the prospect for a volume rebound towards year-end.

A Closer Look at the Exclusive Codeshare Agreement with American Airlines

Gol has disclosed that it has agreed to expand its commercial cooperation with American Airlines Group through an exclusive codeshare agreement for the next three years. Per the deal terms, American Airlines will invest $200 million (equivalent to 15-20% of Gol's market cap) for c. 22 million in newly issued preferred shares at a $9.00/share price. In turn, this implies a wide premium of 144% to the pre-announcement closing price and over 30% relative to the pre-pandemic average trading price in H2 '19. The investment also implies a c. 11x fiscal 2022 EV/EBITDA multiple for Gol, well ahead of the prior 8-9x paid by Delta for LATAM Airlines. In conjunction with the capital increase, AAL will also gain a 5.2% participation in Gol's economic interest, which is considerable, although I would note remains below the stake held by Delta when the deal with LATAM Airlines was announced in late-2019.

Clear Strategic Benefits from Complementary Networks

As Gol pointed out in its press release, the codeshare agreement has been in place since February 2020 and represents the largest network in the Americas, connecting customers to over 30 destinations in the US. Building on its network expansion post-codeshare agreement, Gol has also confirmed that Cancun and Punta Cana (Dominican Republic) will be its first international routes to reopen post-COVID-19 by mid-November 2021. In addition, Smiles and AAdvantage loyalty programs will be partners post-deal, with enhanced benefits coming in early-2022. And perhaps most importantly, the complementary networks of both airlines will allow customers to purchase connecting flights on both airlines using one reservation.

Source: Gol Investor Presentation Slides

As the signing of their first codeshare agreement back in 2020 had already featured talks regarding a potential equity investment by AAL in Gol, the latest announcement only validates American's willingness to further enhance its access to local markets. The upgrade of the agreement also highlights the increased confidence in Gol's growth prospects at a crucial time, with the economy on the verge of fully reopening alongside increased air travel demand globally. Expect more positive news flow going forward - due to ongoing restrictions, significant product enhancements in the current codeshare agreement were likely postponed to after the pandemic, so the eventual return of international travel should further deepen the relationship between both companies.

American Airlines Investment Bolsters the Balance Sheet

Alongside the codeshare announcement, Gol also announced that it has finalized the terms and conditions of the refinancing of BRL1.2 billion in debt (final maturity of 2024), leading to an extension in the average liabilities tenor of over two years to 3.3 years. This represents a major positive for the investment case, as it significantly reduces any potential near-term liquidity pressures under an uncertain macroeconomic backdrop. Coupled with the latest equity raise, Gol looks set to reach the R$3.7 billion mark in longer-term capital raised in the last six months, further bolstering its liquidity cushion. Specifically, the incremental capital raised puts Gol well on track to reach an impressive fiscal 2022 leverage ratio of sub-4x net debt/LTM EBITDA (assuming all else equal). And from a cash flow perspective, the equity amount raised should cover a significant portion of the cash consumption into the upcoming year, leaving Gol well-positioned to capitalize on a post-pandemic rebound by further ramping up its operations.

Source: Gol BCP Conference Presentation Slides

Final Take

Overall, I see the latest announcement by Gol as a positive for the investment case, as it not only boosts Gol's liquidity position amid an uncertain macro backdrop but also comes with a rich valuation premium by AAL. Looking ahead, the deal should reinforce investor confidence in Gol's longer-term fundamentals and strategic position as well as the heavily discounted valuation level (note shares are down by nearly half since the initial COVID-19 outbreak in Brazil). On balance, Gol remains a compelling LatAm economic reopening play, with the undemanding valuation at c. 7x fiscal 2023 EV/EBITDA likely underestimating a steady leisure-led volume rebound towards year-end.

Source: MarketScreener

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.