Friday 6th May 2016
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Air New Zealand’s proposed divestment of its 25.99 percent stake in Virgin Australia could hit turbulence if an election is called in Australia for July 2 as expected.
The Kiwi airline is said to have flagged at an investor presentation day this week that it would like the sales process to be completed by June 30, although today it refused any wider public comment on progress on the decision.
Centre for Aviation analyst Blake Moore said if the election is called this weekend as predicted, that would almost certainly delay getting government and Foreign Investment Review Board approval that’s likely to be needed by a potential buyer. While FIRB is an independent body, the sale would also need a government tick, but typically the government doesn’t make important decisions during an election campaign, he said.
Singapore Airlines, China Southern Airlines, and Hainan Airlines are said to be the most likely buyers for Air New Zealand’s stake although the Singaporean carrier, which currently has a 23.1 percent stake in Virgin, would want to be careful not to upset the other major shareholder Etihad which holds 25.1 percent, Moore said.
Under Australian law, a new shareholder can’t purchase more than 20 percent of Virgin Australia, the country’s second-largest domestic airline, without approval. Similarly, an existing shareholder with more than 20 percent but below 90 percent, can’t automatically increase its holding beyond the 3 percent a year “creep” provision without triggering a full takeover.
If the buying entity is a foreign company – the most likely outcome – they are subject to FIRB approval.
Air New Zealand has kept silent since announcing it was reviewing its shareholding in March but has a range of options for a sale.
Moore said Air New Zealand could sell less than 20 percent of its holding to a new buyer and either retain the remaining 6 percent or sell to a third party, as a way of getting around Australia's regulatory provisions.
Singapore Airlines is the most likely suitor, having a long history of interest in Australia’s domestic market and the strategic and financial means to increase its holding, Moore said. It's currently authorised to increase its shareholding in Virgin to 25.9 percent but is yet to do so.
In April Singapore Airlines settled a series of equity swaps at a cost of A$3.18 million, a premium to Virgin’s share price at the time, which commentators took as a sign it wouldn’t object to injecting further cash into the airline.
The main impetus for Singapore is keeping out another airline shareholder so it can more readily influence Virgin’s strategic direction in the Australian domestic market in its favour, Moore said.
Hainan Airlines has been on a recent buying spree and was believed to be interested in more acquisitions. China Southern, which flies Chinese tourists to and from Australia where China has become the second-largest visitor source, may want to benefit from the two to four domestic flights each Chinese tourist makes on average while on holiday in Australia, which includes across the Tasman to New Zealand, Moore said.
The Kiwi carrier has spent an estimated A$373 million building up and maintaining the Virgin stake since 2011 but faces a considerable loss on that investment given Virgin Australia’s share price has fallen to 28.7 Australian cents. Its share price dropped this week after sharebroker Credit Suisse indicated Virgin could require an A$1 billion equity raising, which is double previous expectations, to reduce debt to reasonable levels after it posted a profit warning earlier in the week.
Moore says the broker’s A$1 billion estimate is “at the high end” but nonetheless doesn’t think Air New Zealand will want to invest more into Virgin, preferring instead to fund its own growth and $2.2 billion capital expenditure programme on new aircraft between 2017 and 2020.
At the investor day, Air New Zealand said it had imputation credits available for up to $750 million worth of dividends but wouldn’t look at paying a special dividend from its current balance sheet position unless there was a catalyst such as successfully divesting its Virgin stake. Air NZ’s debt gearing is sitting at 52.4 percent.
It told analysts that 2017 earnings would be “solid, while not at 2016 levels” as it won’t have the benefit of foreign exchange hedging that it has had this year, and its share price has dropped this week to $2.37. It has earlier forecast earnings before tax of more than $800 million for the 2016 financial year.
Air NZ stopped equity accounting for Virgin Australia at the end of March where the differential between market and carrying value and associated reserves is recorded in the profit and loss. Instead it's recognising the investment in quoted equity instruments – fair value movements recorded in the profit and loss.
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