Question mark over whether Air NZ's sale of Virgin shares will spark special dividend

Friday 10th June 2016

There are mixed views on whether Air New Zealand is likely to pay shareholders a special dividend following the sale of a 19.98 percent stake in Virgin Australia to Chinese conglomerate Nanshan Group for about A$268 million.

The deal announced to the New Zealand Stock Exchange this morning has seen the airline’s share price rise 3.7 percent to $2.25 in today’s trading.

The Auckland-based carrier said it will sell the stake in Virgin, Australia’s second-largest domestic airline, at 33 Australian cents per share, a premium to Virgin’s last traded price on the ASX of 28 Australian cents. It’s also a premium to the 30 Australian cents paid in a share placement last week by fellow Chinese group HNA for a 13 percent stake in Virgin.

Keeping the stake below 20 percent prevents the triggering of regulatory approvals required under Australian law.

The Sydney Morning Herald has reported Air New Zealand is expected to use the sale proceeds to pay a special dividend to its shareholders, which include the government with a 53 percent stake.

But Deutsche Bank analysts say with Air New Zealand still having $2.3 billion of new aircraft expenditure to fund through to 2019, they wouldn’t be surprised to see the board adopt a cautious approach to capital management for now. The divestment will reduce Air New Zealand’s debt gearing levels by around 4 basis points, they said. Reported gearing was 53.8 percent in the first quarter of 2016, which is near the top of its 45-55 percent target range with capital expenditure skewed to the first half.

Air New Zealand said it had “no comment” to make on a special dividend payment.

The Deutsche Bank analysts said accounting-wise, they expected material mark-to-market losses on disposal of Air New Zealand’s full stake, which had a carrying value on its books of around $400 million in the first quarter of this year.

The sale to Nanshan is likely to occur after Virgin’s A$159 million equity placement to HNA Group which will dilute Air New Zealand’s 25.9 percent stake to 22.5 percent. That means it will have a residual 2.5 percent shareholding in Virgin following the Nanshan sale which Air New Zealand chairman Tony Carter said would be considered “in due course”.

Nanshan is a privately-owned Chinese conglomerate which owns a small Chinese airline, Qingdao Airlines, launched in 2014.

Both the share placement to HNA and the sale to Nanshan are subject to Chinese regulatory approval.

Air New Zealand announced in March it was considering selling its Virgin stake which it has spent an estimated A$373 million building up and maintaining since 2011. Carter said the sale will allow Air New Zealand to focus on its own growth opportunities, while still continuing its long-standing alliance with Virgin Australia on the trans-Tasman network.

Deutsche Bank said the HNA Group placement highlighted the risk of incoming cornerstone investors coming in through new equity which benefits them and Virgin rather than buying Air New Zealand’s stake, “so this sale at a tidy premium to market price is a good outcome”. Virgin Australia is expected to proceed with a capital raising of up to A$800 million as early as this month.

The outcome indicates a takeover for Virgin may not be forthcoming, especially now so many airlines hold cornerstone/blocking shareholdings. Other investors include Singapore Airlines, Etihad Airways, and Richard Brandon’s Virgin Group.

BusinessDesk.co.nz

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