China's HNA to buy 13% of Virgin Australia, plans to lift stake to 20%

Passengers walk past a Virgin Australia Holdings Ltd. Boeing 737 aircraft at the domestic terminal of Sydney airport.
Passengers walk past a Virgin Australia Holdings Ltd. Boeing 737 aircraft at the domestic terminal of Sydney airport.PHOTO: BLOOMBERG

SYDNEY (REUTERS) - Virgin Australia on Tuesday (May 31) said China's HNA Aviation will buy a major stake, giving a vital cash injection and greater access to the surging Chinese tourism market just as top shareholder Air New Zealand plans to sell out.

The proposed deal will see HNA Aviation, the largest private operator of airlines in China, invest A$159 million (S$158.9 million) through an equity placement, giving it a 13 per cent stake with plans to go up to 19.99 per cent.

The pair planned to introduce direct flights between Australia and China and co-operate on operations such as frequent flyer programmes, code-sharing and lounge access.

"This is a strategically important alliance," Virgin Australia chief executive John Borghetti told reporters, adding that China was Australia's fastest growing and most valuable inbound travel market. "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 per cent premium to Monday's closing price. The share price rose as high as A$0.30 shortly after the announcement, before easing to A$0.295 by midday.

"Strategically, any involvement in the China market is very much a positive for them and clearly the additional capital will be useful," Bell Potter analyst John O'Shea said, referring to Virgin Australia.

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

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 - part of HNA Group which has announced at least US$10 billion worth of overseas M&A this year - 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. It's a small deal, but if Virgin can bring more flights to Australia it's a good deal for the airline."

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

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

Mr 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. It would need to be assessed by the Australian Competition and Consumer Commission, Virgin said. The Chinese conglomerate would secure a board seat.

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

"We are looking to a number of destinations ... certainly they will be primary ports," he said.

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.