Avianca finds itself in a vulnerable position thanks to a recent default by its controlling shareholder. The default gives United Airlines a chance to take majority control of the growing Colombian carrier.
Avianca is majority controlled by BRW Aviation, a subsidiary of Synergy Group (a South American conglomerate owned by Germán Efromovich). BRW Aviation borrowed $456 million from United in November 2018. This loan was secured by 516 million shares of Avianca common stock.
But now BRW Aviation has defaulted on its United loan (due primarily to problems in Brazil). That gives United the opportunity, if it so chooses, to pursue a breach of contract action again BRW Aviation. Down the road, it could give United control over the Avaianca shares. It is a particularly interesting time, because the default comes as Avianca’s stock prices is depressed. Many analysts, in fact, view the company as greatly undervalued versus current stock price. Thus, United may not only have the right to acquire a majority of Avianca, but may be “buying low” and securing a particularly attractive deal.
Avianca is not party to the loan between BRW Aviation and United Airlines. Instead, it finds itself in the middle, pensively waiting for United to act…or not to act. In its 2018 annual report, Avianca addressed the possibility of a BRW Aviation default:
The existence of one or more events of default under the United Loan entitles United or its collateral agent to take enforcement action in relation to 78.1% of our common shares, which could result in United or its collateral agent taking steps to enforce the share pledge, including ultimately taking control of our company or selling such control to a third party, which in turn could constitute an event of default under several of our financing agreements, including material bilateral and multi-lender credit facilities and substantially all of our ECA financings covering our aircraft.
Put simply: Avianca is well-aware of what United could theoretically do.
United’s Careful Investment In Avianca
United Airlines has every incentive to carefully preserve Avianca during this process, not hurt it. The two carriers (along with COPA) signed a revenue-sharing joint venture agreement in 2018. If United-Continental holdings becomes the primary shareholder, it certainly will not want to hurt its investment.
And Avianca has so much potential. It commands a huge market share in the Central America domestic market, boasts consistently high load factors, and has turned its LifeMiles loyalty program into a lucrative venture. Avianca Cargo is also growing nicely and Colombia’s emergency from a civil war has increased demand within Colombia for national and international travel.
Put simply, Avianca is well-positioned to grow and its current depressed stock price brought about, in part, by the BRW Aviation default may present a once-in-a-lifetime opportunity for United.
Although technically no foreign ownership rules in Colombia exist like in much of the world, Colombian regulators and the court system may attempt to put the brakes on an acquisition from United. But on paper and in theory, United has a right to seek control of Avianca. It could make for a very interesting expanded partnership…
For more technical details, check out this helpful article.