Air NZ's stake in Virgin could be easier to sell after Chinese airline buys stake

Tuesday 31st May 2016

Air New Zealand’s proposed sale of its 25.99 percent stake in Virgin Australia could be aided by a Chinese airline operator's new stake in Virgin.

Virgin Australia today announced a deal worth A$159 million with HNA Aviation Group, which is the largest private operator of airlines in China, with a placement of new shares to subsidiary HNA Innovation giving HNA a 13 percent stake in Virgin.

The shares were issued at 30 Australian cents each, a 7.1 percent premium on yesterday's closing price. HNA also said it intends to increase its shareholding over time to 19.99 percent.

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.

In March, Air New Zealand announced it was considering selling its stake in Virgin Australia and had hired First NZ Capital and Credit Suisse to advise on its options. It has not commented since, apart from saying it would like the sales process to be completed by June 30 at an investor presentation day earlier this month. It did not respond to a request for comment today.

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. Virgin's share price dropped early this month after sharebroker Credit Suisse indicated it could require an A$1 billion equity raising, double previous expectations, to reduce debt to reasonable levels after it posted a profit warning.

Virgin took out a US$125 million loan in the first half of its financial year following a decline in its free cash flow to A$544 million from A$839 million a year earlier. In March, Virgin's cornerstone shareholders - Air NZ, Etihad Airways, Singapore Airlines and Virgin Group - committed to providing A$425 million of one-year funding to allow the airline to review its mix of debt and equity and consider operational initiatives to boost cash flow and profitability. Air New Zealand's share of the loan was A$131.2 million. It wasn't made clear whether the loan would be used to repay debt.

"Perhaps that's why Air New Zealand is a little bit firmer today - there are clearly interested parties in Virgin, and it's at a premium to the share price," said Rickey Ward, NZ equity manager at JBWere. "Maybe it is fuelling speculation there could be a takeover. I wonder whether this alleviates some debt concerns, but more importantly, it helps promote interest that there are people keen to buy a stake in Virgin, which potentially helps Air New Zealand exit their position."

Air New Zealand shares gained 2 percent to $2.26 today, while ASX-listed Virgin shares gained 7.1 percent to 30 cents.

Air New Zealand and Virgin formalised an alliance in 2010 with codesharing agreements on trans-Tasman and connecting flights and reciprocal frequent flyer and lounge access deals. The tie-up was first mooted in response to Qantas Airways' two-airline strategy where its low-fare Jetstar unit operates domestically in New Zealand and links to longer-haul flights on its parent.

BusinessDesk.co.nz

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