Virgin move tricky for Air NZ sale

Analysts said the deal, struck without Air NZ's involvement, would complicate the sale process. Photo / Richard Robinson

Chinese firm's buy-in to Oz airline struck without Kiwi carrier's involvement and is tipped to complicate its selldown.

Air New Zealand's planned sale of its 26 per cent stake in Virgin Australia struck a complication yesterday with the surprise addition of China's HNA Aviation Group to Virgin's share register through a A$159 million share placement.

The transaction, which dilutes Air NZ's holding to 22.5 per cent, will go some way towards shoring up Virgin Australia 's balance sheet and, at A30c a share, establishes a ball park figure for the shares if and when Air NZ sells its stake.

At A30c, the shares were issued at a 7.1 per cent premium to Monday's closing price, and they rallied to just under that level after the deal was announced to the market. Post-placement, HNA will own about 13 per cent in Virgin Australia, but it intends to increase its stake over time up to 19.99 per cent.

Analysts said the deal, struck without Air NZ's involvement, would complicate the sale process.

"They have clearly placed new shares at a time when Air NZ is trying to sell its existing shares, so I guess the implications of that will only become clear in the next few weeks," said Salt Funds Management managing director Matt Goodson. Virgin Australia said it had formed a strategic commercial alliance with HNA that would accelerate its access to the rapidly growing Chinese travel market. Under the alliance, the companies will look to introduce direct flights between Australia and China.

The alliance with HNA - a Fortune Global 500 conglomerate and the largest private operator of airlines in China - will also involve code-sharing, frequent-flyer programmes, lounge access and promotion of tourism and business travel.

The deal means HNA will become a major Virgin Australia shareholder alongside Air NZ, Singapore Airlines and Etihad Airways. Harbour Asset Management portfolio manager and analyst Shane Solly said the placement effectively established a price for Virgin Australia while at the same time diluting the holdings of the other shareholders. "It is a line in the sand for anyone intending to take a stake in Virgin Australia," Solly said.

"Air NZ was not part of the [deal] process and now Virgin Australia has another source of capital," he said. "It takes the pressure off the balance sheet but it does not solve all of Virgin Australia's issues with its capital structure."

HNA said its member airlines fly over 77 million passengers annually on nearly 700 routes to more than 200 destinations in China and internationally.

Air New Zealand announced last month that chief executive Christopher Luxon had resigned from Virgin's board and that the company was considering a sale of all or part of its 25.9 per cent stake.

Air NZ's shares, which went from $3.03 in early April to $2.02 on May 25, have been firming, ending yesterday at $2.25 - up 3.5c.

Virgin Australian in May reported an underlying loss before tax of $18.2 million in the third quarter to March 31 and an underlying profit before tax of $62.9 million in the year to date.