October 20, 2004
Cathay Pacific Airways will buy a 9.9 percent stake in Air China when China's flag carrier launches an initial public offering, the airlines said on Wednesday.
The deal, which took observers by surprise, gives a boost to Cathay's long-frustrated China ambitions and could make Air China's planned IPO more attractive, one analyst said.
Beijing-based Air China, which is the mainland's third-largest carrier, has applied to the Hong Kong stock exchange for its IPO, the companies said in a statement.
It hopes to list its shares by late this year or early 2005 in an offer that could raise more than USD$500 million and may also include a secondary listing in London, a source familiar with the deal said earlier on Wednesday.
"In my view, it's going to be a hard sell in this market. But with Cathay as a strategic investor, it may help," said Michael Chan, aviation analyst at BOC International.
Hong Kong-based Cathay is the territory's dominant carrier, but its access to fast-growing mainland China has been limited to just three passenger flights a week to Beijing.
This week it said it won rights to add additional passenger services to Beijing, as well as new cargo services to Shanghai and passenger service to Xiamen.
The agreement between Cathay and state-owned Air China calls for further cooperation between the two, including potential alignment of their networks.
"Strategically, it is immensely important for (Cathay)," industry consultant David Dodwell said.
Industry watchers had long expected Cathay to broaden its cooperation with China Eastern Airlines, which is based in Shanghai, a market Cathay covets.
Air China is expected to sell 27 to 28 percent of its enlarged share capital at eight to 10 times its forecast 2004 net profit, sources have said previously. It earned 93 million yuan (USD$11.2 million) in 2003.
Cathay Pacific, which is 46 percent owned by property-focused conglomerate Swire Pacific, will take 9.9 percent of the expanded share capital of Air China.
"We believe that there are many areas of our operations where we can cooperate together and leverage our respective strengths," Kong Dong, vice chairman of Air China, said in the statement.
"We look forward to becoming Air China's strategic partner and to a mutually beneficial relationship between our two companies," David Turnbull, Cathay's chief executive, said in the statement.
As of June 30, Air China operated a fleet of 136 aircraft serving 69 domestic and 34 international destinations.
The tie-up would further complicate the ownership structures of the respective carriers.
(Reuters)
