Air China Ltd. will spend HK$6.3 billion ($813 million) to raise its stake in Cathay Pacific Airways Ltd. to 29.99 percent, expanding its presence in Hong Kong after being shut out of Shanghai.
The world’s biggest airline by market value will buy 491.9 million Cathay shares for HK$12.88 each from Citic Pacific Ltd., according to a stock exchange statement today. Swire Pacific Ltd. will also buy HK$1 billion of Cathay shares from Citic at the same price, an 11 percent premium. Swire will remain Cathay’s largest shareholder.
Beijing-based Air China will boost its stake in Cathay from 17.5 percent after efforts to build a Shanghai hub were derailed by China Eastern Airlines Corp.’s planned takeover of Shanghai Airlines Co. Cathay may benefit from closer ties with China’s second-largest carrier as the country has avoided a global slump in air travel because of a government economic stimulus package.
“Air China must be proactive in expansion, given the fact that it lost the opportunity in Shanghai,” said Jack Xu, an analyst at Sinopac Securities Asia Ltd. “Hong Kong is a good alternative and with the increased stake, Air China may have more say in operations like route planning.”
Cathay, Citic and Air China will resume trading in Hong Kong tomorrow after being halted today pending announcements. Swire’s stake in Cathay will rise to 42 percent from 40 percent following the agreement.
Cathay has no immediate plans to add to its 18 percent stake in Air China, Chief Operating Officer John Slosar told reporters in Hong Kong today. Air China won’t appoint any managers to Cathay, he said.
Short of Takeover
Air China and Swire both bought as much of Cathay as they could without triggering mandatory takeover offers, said Christopher Pratt, chairman of Swire and Cathay. The talks on the sale were “very speedy,” he added.
“While I confidently expect our strategic partnership with Air China to continue to grow, I would stress that the new shareholding will not mean any change in the current strategy and operational and financial management of Cathay Pacific,” Pratt said.
Air China will take over two Cathay director seats currently held by Citic, according to the statement. The two carriers plan to boost cooperation in sales, training and other areas, Pratt said.
Air China’s bigger stake in Cathay “would certainly reinforce the partnership,” said Damien Horth, an analyst at UBS AG in Hong Kong. He said he was “surprised” by the transaction.
Selling the Cathay shares will let Citic Pacific better focus on its main operations, Kong Dan, chairman of parent Citic Group, said in Hong Kong today. Citic Pacific said in May it would sell off assets that weren’t efficiently managed or that had low returns after it sought a state bailout following derivative losses. The company intends to hold onto its remaining 3 percent stake, Swire’s Pratt said.
Cathay fell 1.9 percent on Aug. 14 to HK$11.62 in Hong Kong. It has gained 33 percent this year. Air China, the nation’s largest international carrier, closed little changed at HK$4.57 in the city. It’s up 90 percent this year.
Cathay’s first-half passenger numbers fell 4.2 percent and sales tumbled 27 percent, as the global recession hammered international travel. It made a net income of HK$812 million following a HK$2.1 billion fuel-hedging gain.
The airline operates 123 planes, flying to 36 countries or territories, according to its Web site. Its Hong Kong Dragon Airlines Ltd. unit serves 29 destinations, predominately on the mainland. American Roy C. Farrell and Australian Sydney H. de Kantzow set up Cathay in 1946. A forerunner to Swire Group acquired a 45 percent stake in 1948.
Air China had 243 planes at the end of last year, including its cargo unit, and a network covering 129 cities and 259 routes, it said in its annual report. The routes included 82 international or regional services and 177 domestic ones.
The carrier said last month it expects to report a 50 percent-plus increase in first-half profit. Its passenger numbers rose 14 percent, as China’s stimulus spurred domestic travel. Nationwide passenger numbers rose 20 percent to 100.4 million, according to the Civil Aviation Administration of China.
Air China’s parent made an offer last year to buy a stake in China Eastern in order to expand its foothold in Shanghai. China Eastern rebuffed the offer and it has now agreed to take over smaller neighbor Shanghai Airlines to gain a 50 percent market share in China’s financial capital.