HNA To Buy Virgin Australia Stake

May 31, 2016

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China's HNA Aviation will buy a major stake in Virgin Australia, giving the carriers greater access to each other's home markets, just as biggest shareholder Air New Zealand plans to sell out.

The proposed deal will see HNA Aviation, the largest private operator of airlines in China, invest AUD$159 million (USD$114 million) through an equity placement, giving it a 13 percent stake in Virgin Australia with plans to go up to 19.99 percent.

The pair plan to introduce direct Australia-China flights and co-operate on frequent flyer and code-sharing. While the deal bolsters Virgin Australia's finances, it gives HNA, owner of China's Hainan Airlines, access to a lucrative market as its parent extends a USD$10 billion push overseas to rival the country's state-backed airlines.

"This is a strategically important alliance," Virgin Australia chief executive John Borghetti told reporters. China was Australia's fastest-growing and most valuable inbound travel market, he said.

"They've discussed their desire to get (to 19.99 per cent) as quickly as possible."

New Virgin Australia shares will be issued to HNA Aviation at A$0.30 each, representing a 7.1 percent premium to Monday's closing price. The shares closed at A$0.30 on Tuesday.

Virgin Australia requires the cash injection to cut debt amassed, in part, by its expansion out of the low-cost carrier market to compete with Qantas.

The deal is separate to Air New Zealand's plans to sell its stake in Virgin Australia, which will represent 22.5 per cent of the airline after the diluting impact of the new share issue is taken into account.

It is not clear why HNA Aviation did not purchase the New Zealand company's share. An Air Zealand representative declined to comment on that sale, which is still open.

"You'd rather have China as a shareholder (than New Zealand), wouldn't you?" Clime Asset Management senior equities analyst David Walker said. "This deal is a sign of the times and a pointer to the future."

MOVE OVER

Air New Zealand's 25.9 percent stake will be diluted to 22.5 percent after the initial placement, Virgin Australia said.

Etihad Airways' holding will fall from 25.1 percent to 21.8 percent, Singapore Airlines' stake will drop from 23.1 percent to 20.1 percent. The holding of entrepreneur Richard Branson's Virgin Group will decrease from 10 percent to 8.7 percent.

Borghetti said the HNA deal had not been discussed with Air New Zealand prior to Tuesday's announcement.

Virgin did not expect the deal would require approval from the Foreign Investment Review Board, but would need to be assessed by the Australian Competition and Consumer Commission, Virgin said. The Chinese conglomerate would secure a board seat.

Borghetti said he expected to see Virgin Australia aircraft in China in the first half of 2017, with major cities including Beijing and Hong Kong likely destinations.

HNA's Hainan Airlines does not currently operate scheduled services to Australia. Working with Virgin will help it compete against domestic rivals China Southern and China Eastern, which do fly to Australia.

"The China-Australia market is buoyant and you can expect to see more capacity in the coming months," said Hong Kong-based Eric Lin, Director of Asia Transport Research at UBS.

The proposed deal follows an announcement on Monday that HNA had entered exclusive negotiations to buy a stake in Servair, the catering business of Air France-KLM.

HNA has stakes in Brazil's Azul and TAP Portugal, and owns Turkish aircraft maintenance firm myTechnic and ground-handling firm Swissport.

Its Bohai Leasing unit bought aircraft leasing firm Avolon in January, giving it a fleet of more than 500 planes in total.

(Reuters)