Armed Indonesian Air Force soldiers secure the Virgin Australia 737-800 plane at the tarmac of Denpasar airport in the resort island of Bali.-AFP
SYDNEY: Virgin Australia on Tuesday 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 (US$114 million) through an equity placement, giving it a 13% stake with plans to go up to 19.99%.
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%) as quickly as possible."
New Virgin Australia shares will be issued to HNA Aviation at 30 Australian cents each, representing a 7.1% premium to Monday's closing price. The share price rose as high as 30 Australian cents shortly after the announcement, before easing to 29.5 cents 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% 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% stake will be diluted to 22.5% after the initial placement, Virgin said.
Etihad Airways' holding will fall from 25.1% to 21.8%, Singapore Airlines' stake will drop from 23.1% to 20.1% and the holding of entrepreneur Richard Branson's Virgin Group will decrease from 10% to 8.7%.
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.
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," Borghetti 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. - Reuters
