SIA may raise stake in Virgin Australia

A Virgin Australia aircraft parked at Sydney airport. The carrier is offering existing investors one share for every one they already hold at 21 Australian cents.
A Virgin Australia aircraft parked at Sydney airport. The carrier is offering existing investors one share for every one they already hold at 21 Australian cents.PHOTO: BLOOMBERG

This will be done if needed to defend turf: Analysts

Singapore Airlines (SIA) is defending its strategic investment in Australia by committing to take up its entitlement in Virgin Australia's A$852 million (S$854 million) equity raising.

SIA said yesterday it intends to take up extra stock not bought by other shareholders via a sub-underwriting arrangement. This could raise its stake from 23.1 per cent to 25.9 per cent and give it firepower to take on Qantas Airways, a fierce rival of SIA, and as a defence against Chinese carriers muscling into the Australian market, analysts say.

Following a capital structure review, Virgin, Australia's second-biggest airline after Qantas, said it will offer existing investors one share for every one they already hold at 21 Australian cents. It plans to use the A$852 million to repay debt and fund a cost-cutting programme. SIA is taking up the new shares to "ensure that its stake in Virgin Australia is not significantly diluted" and to "remain a substantial shareholder". This will be funded with internal sources of about $271.1 million.

"The company is confident of the long-term prospects of Virgin Australia and is committed to supporting its long-term growth," it added.

OCBC Investment Research, which has a buy call on SIA, noted in an earlier report that "apart from Europe, Australasia is another key market of SIA" and a bigger stake in Virgin Australia may help SIA "compete more effectively with the existing dominant player - Qantas".

CONNECTING THE DOTS

There could be incidental benefits like connecting flights that Virgin Australia provides, which may be dependent on SIA staying a shareholder without diluting its stake against other competing shareholders like Etihad.

MR K. AJITH, of UOB Kay Hian.

But Mr K. Ajith of UOB Kay Hian noted that the investment "hasn't made commercial sense" as Virgin Australia's earnings have been lacklustre, and its share price has not been performing.

The stock, which closed yesterday at 26 Australian cents - its lowest level this year - has been hovering at an average of around 40 Australian cents since 2011, a far cry from the high of A$2.24 in April 2007.

"But there could be incidental benefits like connecting flights that Virgin Australia provides, which may be dependent on SIA staying a shareholder without diluting its stake against other competing shareholders like Etihad. If SIA has no board representation, then other shareholders may be less willing to have a codeshare alliance with SIA," Mr Ajith said.

The other shareholders supporting Virgin Australia's offer include Sir Richard Branson's Virgin Group, Chinese conglomerate HNA Group and Nanshan Group.

The capital raising comes just two weeks after HNA bought a 13 per cent stake in Virgin Australia for A$159 million and after Nanshan, a privately owned Chinese group that owns Qingdao Airlines, struck a deal last week to buy a nearly 20 per cent stake in Virgin Australia from Air New Zealand.

In March, Virgin Australia secured a A$425 million loan from SIA, Air New Zealand, Etihad Airways and Virgin to see it through the assessment period while it reviewed its capital structure.

A version of this article appeared in the print edition of The Straits Times on June 16, 2016, with the headline 'SIA may raise stake in Virgin Australia'. Print Edition | Subscribe