Brazil's airline Varig to go on auction block

UPDATE 2-Brazil's airline Varig to go on auction block
Tue May 9, 2006 7:15 PM ET

RIO DE JANEIRO, Brazil, May 9 (Reuters) - Brazilian airline Varig's <VAGV4.SA> routes and planes will be auctioned for a minimum price of $860 million under a plan approved by creditors and the government at a meeting on Tuesday, marking the latest chapter in a contentious bankruptcy saga.

"We were able to reconcile (different) interests and we took a big step" toward saving the carrier, Varig President Marcelo Bottini said at a hangar at Rio de Janeiro's Santos Dumont Airport.

Domestic and international routes will be sold together at the auction in about 60 days under the plan designed by consultants Alvarez & Marsal. The firm has been given the task of rescuing the traditional flagship airline from collapse.

Varig, which is operating under bankruptcy protection, has lost its domestic market leadership and now ranks third behind Brazil's biggest airline TAM <TAMM4.SA><TAM.N> and No. 2 Gol <GOLL4.SA><GOL.N>.

If the minimum price is not met, the foreign and domestic routes will be sold separately. The domestic operation would go on sale at a minimum price of $700 million.

The auction will separate flying operations from the part of the company that deals with ticketing, reservations and the frequent flyer program.

Varig, with 10,000 employees, has debts of more than 7 billion reais ($3.38 billion).

Brazil's state-run BNDES development bank would provide a loan of nearly $100 million for the company to keep operating until the auction, said Marcelo Gomes, who is in charge of Varig's recovery plan at Alvarez & Marsal.

BNDES will offer the loan to interested companies which will then lend the money to Varig. An eventual Varig buyer can pay back the credit, or if the same lender buys Varig, the winning bidder can discount the sum from its offer.

The overall Varig fleet to be offered includes 46 planes. The domestic operation would consist of 30 aircraft.

Financial investors can bid for the whole operation. But for the domestic part they must bid together with an operating airline. BNDES can finance up to half of the offer paid at the auction.

Gomes said 10 companies had already shown an interest, including former Varig unit VarigLog, which had offered $400 million for the operational part of the firm. He gave no other names, but said he expected a lot of bidders.

A data room, where potential bidders can obtain all crucial information about Varig and the sale, will be opened within 30 days.

The Varig brand name will be preserved for international flights but its use for domestic routes is still being discussed.