Brazil’s GOL acquires Varig

GOL, Brazil’s low-cost airline has agreed with VarigLog and Volo, the controlling shareholders of VRG Linhas Aereas S.A. (“VRG”, airline that operates the Varig brand), to acquire the total share capital of VRG. The total consideration offered for the shares of VRG is approximately US$275mm, consisting of US$98mm of cash (representing less than 10% of GOL’s total cash), and approximately 6.1 million non-voting (PN) shares issued by GOL (representing approximately 3.2% of GOL’s total shares outstanding), with various sale restrictions for up to 30 months.

With the assumption of R$100mm (US$45mm) of debentures, the total aggregate value of the transaction is approximately US$320mm. This closing is conditioned on obtaining all the customary regulatory approvals from the authorities, including the Brazilian Antitrust Agency (CADE) and the National Civil Aviation Agency (ANAC); GOL will keep investors informed of approvals.

VRG will be acquired by GTI S.A., a wholly-owned subsidiary of GOL Linhas Aereas Inteligentes. The companies will keep separate financials and will be managed according to best practices in corporate governance and internal controls. VRG will operate with its own brand (VARIG), differentiated services, incorporating the low-cost business model from GOL, and independent administration, separate from GOL’s operating subsidiary GOL Transportes Aereos S.A, which will continue to invest in its unique low-cost operating model.

GOL and VRG will be managed as independent companies with focused business models. GOL will maintain focus on its low-cost, low-fare business model, with a single-class of service in the Brazilian domestic market and South America. The Company maintains its commitment to popularizing air travel, making low-fare flights more accessible to a larger portion of the population. VARIG (brand operated by VRG) will offer differentiated services, with direct flights and a mileage program (Smiles), which currently serves more than 5 million clients. On long-haul international routes, VARIG will offer two service classes: coach and business. In the domestic market, VARIG will operate with a single-class of service, prioritizing flights between the main economic centers of Brazil, with principal bases of operation at Congonhas, Guarulhos, Santos Dumont and Galeao airports. Both companies will explore synergies resulting from gains in efficiency, quality and competitiveness. The complementary networks of the two operating subsidiaries will permit wide feeder and distribution of VARIG’s international flights, offering passengers arriving or departing from Brazil numerous and flexible connection options.

The combined strength of GOL and VARIG will establish a Brazilian airline group with a growing passenger base of over 20 million annually, capable of competing on the South American and world stages against other large international airlines. GOL and VARIG together, through higher efficiencies generated to the market and consumers, will be ready to assume leadership of domestic and international flights among Brazilian carriers. The combination of these two companies will provide the ability to increase the number of seats offered at low fares and will stimulate growth in air travel.

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The acquisition represents the best opportunity for operations under the VARIG brand to remain a Brazilian-managed and controlled airline, fully focused on the strategic objectives of growth, job creation, and competitiveness, while remaining a strong Brazilian flag carrier. GOL believes there are opportunities to maximize the purchasing power of the two subsidiaries to further reduce operating costs, increase efficiencies, continue to innovate the Brazilian market for air travel, and pass on the benefits of synergies between the companies to the traveling public.

VARIG will incorporate modern concepts of efficient administration, asset optimization, intensive use of technology, efficient and economic fleet, transparency, innovation and employee motivation, which will make the company competitive, profitable, financially sound, and capable of sustained growth.

VRG’s fleet, currently operating with 17 aircraft, will be increased to 34 Boeing aircraft composed of a simplified fleet of 20 737 and 14 767 aircraft. This fleet will permit VARIG to serve more than ten international destinations in Europe (Frankfurt, London, Madrid, Milan and Paris), North America (Miami, New York and Mexico City), and South America (Buenos Aires, Santiago, Bogotá and Caracas).

“GOL intends to provide VARIG with the necessary ambition, management expertise, financial strength and cost base to compete with South American and world competitors. With this acquisition, Brazil will maintain an important flag in global aviation, the industry will benefit from an increase in jobs and demand will be better served,” said GOL’s Chief Executive Officer, Constantino de Oliveira Junior. “We are confident that throughout this acquisition GOL will continue its mission of popularizing air travel and consolidate its position as one of the leading low-cost carriers in the world. We will work so that our companies become the Brazilian carriers of choice for both domestic and international passengers.”

In summary, GOL will offer a viable, financially secure future for VARIG through its strategy which includes:


 
  - Maintenance of the VARIG brand and the operation the two airlines
    separately;
  - Improving the service offering under the VARIG brand, including the
    Smiles mileage program, and increasing the quantity of direct flights;
  - Expanding service to routes not currently operated;
  - Reducing VARIG’s operating costs through improved efficiencies,
    superior purchasing power and lower overhead;
  - Facilitating the expansion of the fleet operating the under the VARIG
    brand, by providing it with modern and efficient aircraft, low-cost
    leasing and financing facilities, and using purchasing power to
    negotiate lower costs;
  - Improving the quality of the long-haul fleet operating the VARIG brand,
    and updating and innovating its long-haul product.
 
VRG is a company based on the Isolated Productive Unit (UPI) of VARIG, created in the Bankruptcy Recovery Plan of VARIG, Rio Sul and Nordeste (together, the “Recovering Companies”) and acquired by VarigLog in the Judicial Auction realized on July 7, 2006. Under the Brazilian Company Recovery Law of 2005, the UPI was created and sold fully free of liabilities of any nature (civil, labor, tax, pension, etc.), and upon completion of the conditions established in the Auction Edital, so to assure payment to creditors and the continued existence of the Recovering Companies. With the acquisition, GOL fully assumes the obligation to assure that VRG completes, in the strictest terms, all of the terms of the Auction Edital, including: (a) honor the two debentures already issued in the value of R$50mm each, with 10- year maturities, (b) the hiring of the services of the Varig Training Center with a minimum value of R$1mm, and (c) the rental at market rates of some fixed assets from VARIG.
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