Air New Zealand will maintain its stake in Virgin Australia by spending up to $130 million in a rights issue analysts say will attract increased scrutiny as the airline is drawn into a deeper financial commitment across the Tasman.
Since early 2011 Air New Zealand has spent several hundred million dollars building its Virgin stake which one analyst said had "raised eyebrows".
One fund manager said that as the spending on Virgin grew, the stakes got bigger for Air New Zealand.
"As it becomes a bigger part of Air New Zealand it becomes more of something for the market and shareholders to focus on because they'd be wanting a return on this investment," said Peter Harrison of Salt Funds Management.
Air New Zealand closed unchanged yesterday at $1.67.
Virgin yesterday announced a A$350 million capital raising and its other airline shareholders, Singapore Airlines and Etihad, which hold just under 20 per cent, will also be taking up the offer on a pro rata basis.
Air New Zealand holds a 22.9 per cent stake of Virgin Australia shares and has regulatory approval to increase that to 25.99 per cent.
The airline said it would take up its full entitlement under the rights issue and sub-underwrite the issue with the other major shareholders.
It said that if additional shares were available from the underwriting, its shareholding could increase to as much as 25.5 per cent, a stake that would be worth about A$265 million at Virgin's current share price.
Virgin suffered a A$98 million loss in the past financial year and is having to spend heavily to hold its position in the business market in Australia. The airline will use the funds to reduce debt.
Air New Zealand started investing in Virgin in 2011 to give it access to the Australian domestic market and rationalise its transtasman operations.
"The additional investment by Air New Zealand of between A$81 million and A$116 million will strengthen the Virgin Australia balance sheet and enable the continuation of its strategy as it enhances its market position and improves business performance following a period of substantial change and growth," said Air New Zealand chief executive Christopher Luxon. The rights issue will mean a loan facility of A$38 million from Air New Zealand will not be used.
Air New Zealand's last big foray into Australia ended in disaster with the collapse of Ansett. Harrison said there was a big difference this time.
"This seems a little bit better, more measured - being forced to buy Ansett last time was not an ideal position to be in."
Rickey Ward, head of equities at Tyndall Investment Management, said some investors had "struggled" with the Air New Zealand strategy.
"The company's willingness to increase their stake above 20 per cent certainly raised numerous questions and eyebrows."
While he said he could personally understand the merits of better connections within Australia, "outside of that the reasoning becomes more challenging. It almost appears as though the investment is only there to stop, or eliminate, either Etihad or Singapore from outright acquiring a domestic connection route".
Air New Zealand has about $1.2 billion of cash which Goldman Sachs head of research Marcus Curley said allowed the airline to easily handle the extra investment.
"It's [stake in Virgin] getting larger in the context of the market cap. People remain relatively patient with it and they're taking Air New Zealand on their word that Virgin has the right strategy and it will pay dividends. There's still a level of trust."
- additional reporting Tamsyn Parker