Citic Pacific sells 14.5% stake in Cathay Pacific to Air China and Swire Pacific

Air China and Swire Pacific will buy a majority of Citic PacificÆs 17.49% stake in Cathay Pacific, in a deal worth $942 million.

Air China and Swire Pacific will buy the majority of Citic Pacific's shareholding in Cathay Pacific Airways, upping significantly the Chinese flag carrier's stake in Cathay. The deal has been positioned as a new boost to the growth plans of the Hong Kong-based airline.

Citic Pacific will sell 491.8 million Cathay Pacific shares, representing 12.5% of the company's outstanding shares, to Beijing-based Air China and an additional 78.6 million shares, representing 2% of the company, to Swire Pacific. The entire deal is worth around HK$7.3 billion ($942 million) at HK$12.88 per Cathay Pacific share with Air China paying HK$6.3 billion and Swire HK$1 billion. The price is an 11% premium to Friday's closing price of Cathay Pacific's shares on the Hong Kong Exchange.

Once the deal is approved by regulators, Air China will own a 29.99% stake in the Hong Kong-based airline, the maximum allowed under a 2006 cross-shareholding deal between the two airlines. Swire Pacific will remain Cathay Pacific's largest shareholder with a 41.97% stake. Citic Pacific will retain a 2.98% shareholding in the airline.

Cathay Pacific's 18% stake in Air China remains unchanged.

"I believe this confirms our two largest shareholders' full and ongoing support for Cathay Pacific and its long-term future," said Christopher Pratt, chairman of both Swire Pacific and Cathay Pacific at a media briefing to announce the deal yesterday evening. "This is particularly pertinent at a time when the aviation industry is under such enormous pressure worldwide."

In the first half, Cathay Pacific reported a paper profit of HK$812 million on the back of one-time fuel hedge gains. Without the one-time earnings the airline lost HK$60 million. As of the end of June, Cathay Pacific had HK$11.3 billion in cash.

Pratt rebuffed any suggestion that the shareholding change could be preparation for an equity raising exercise. "Cathay has no immediate plans to go to the equity markets for a rights issue or additional funds," he said. "That could change but at the moment it's not on the agenda."

In Hong Kong, Cathay Pacific's shares closed at HK$11.62, down 1.9%, in Friday trading, the last day its shares traded before they were suspended yesterday pending an announcement. Year-to-date the airline's shares are up 33%. Air China shares were down 1.9% on Friday, closing at HK$4.57. The airline is up 90% year-to-date.

Some experts see the acquisition as a move by Air China, the world's largest airline by market capitalisation, to expand on the cheap. Though Cathay Pacific's share price has risen since the beginning of the year, it is still down some 20% from this time last year.

The increased shareholding comes after Air China's parent tried and failed to buy Shanghai-based China Eastern Airlines in a hostile takeover bid last year. Last month, China Eastern acquired smaller competitor Shanghai Airlines for an estimated $1.3 billion.

There will be no executive leadership changes at Cathay Pacific resulting from the share sale. Two Citic Pacific seats on the airline's board of directors will be transferred to Air China.

Pratt said any additional potential changes at Cathay Pacific would be "very positive" but would not elaborate.

The deal is expected to increase cooperation between Air China and Cathay Pacific. Currently the airlines partner between Hong Kong and seven destinations in China, as well as on frequent flyer programmes and employee training.

"There's lots more we can do with Air China in the future," said John Slosar, chief operating officer of Cathay Pacific at yesterday's briefing.

A long pending joint venture between the two airlines' cargo businesses will likely receive a boost. Slosar said the joint venture is "complicated" and that the "tribulations and trials" of the market this year have slowed the conclusion of the deal.

In a statement, Citic Pacific said its sale of the majority of its stake in the airline was in "keeping with Citic Pacific's plan to focus on its major businesses". Earlier this year the company had said it would review its operations and sell off poorly performing assets.

Hong Kong regulations restrict Swire Pacific from purchasing a larger stake in the airline. A purchase of more than 2% would have triggered a requirement for open bidding on the whole of Cathay Pacific.

"Swire Pacific is the dominant shareholder in Cathay Pacific," said Pratt. "It's not our intention to reduce our ownership."

In 2006, Air China and Cathay Pacific agreed to a cross-shareholding deal where the Chinese airline took a 17.5% stake in Cathay and the Hong Kong airline increased its stake in Air China to 18%. At the same time, Cathay Pacific bought the entirety of Dragonair, a Hong Kong-based regional airline primarily serving China, for $1.06 billion. The agreement limited Air China to holding no more than a 29.99% stake in Cathay Pacific. Cathay can increase its shareholding in Air China to 30%.

Both Cathay Pacific and Swire did not work with a financial adviser.

¬ Haymarket Media Limited. All rights reserved.
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