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This deal is a huge expansion for Lan Airlines (LFL) that will turn Chile’s national airline into a truly South American airline.

Lan will buy Brazil’s Tam (TAM) for $3.7 billion. Shareholders of Lan will own 70% of the combined company. (Tam will be delisted and the new shares for LATAM Airlines will trade in New York, Santiago, and Sao Paulo.)

The acquisition will make Lan, with strong routes and market share in Chile, Peru, Argentina, and Ecuador, a dominant player in the Brazilian market. (Tam had about 42% of the Brazilian domestic market as of the end of the second quarter of 2010.) Tam’s revenue last year of$4.9 billion was greater than Len’s revenue of $.37 billion.

I’ve got three reasons to like the deal.

First, rising incomes in Brazilian have created a fast growing market for domestic air travel. The country is so big that air travel is the preferred mode of transportation for many Brazilians and with rising incomes more than act on that preference. (Tam and its competitors have launched innovative financing plans that make it possible for more Brazilians to fly.

Second, despite its huge market share in Brazil Tam hasn’t been profitable recently. Combining with Lan will result in an estimated $400 million in annual cost savings for the two airlines.

Third, with the deal Lan emerges as the most likely candidate for a South American global carrier. By total revenue the new company, LATAM Airlines, will be the world’s 15th largest carrier (11th by passenger miles) with service to 116 destinations in 23 countries.

I’d like to see the market’s enthusiasm for the deal recede a bit—Lan shares rose almost 8% in Santiago on Friday, August 13—before buying a new position or adding to an existing one. But this is definitely a stock I’d look to acquire on any dip.

Lan, soon to be LATAM, is a member of my Jubak Picks 50 portfolio .

Full disclosure: I do not own shares of any company mentioned in this post in my personal portfolio.