Air New Zealand orders a review of holding in Virgin Australia

Air New Zealand has sent Virgin Australia shares into a 9.3 per cent free fall as it outlined a review of its stake.

General, generic, stock photo of a Virgin Australia passenger jet airplane coming in to land at the Cairns Airport, bringing domestic tourists into the Far North Queensland region. PICTURE: BRENDAN RADKE

Virgin Australia could emerge as a takeover target from shareholders Etihad Airways or Singapore Airlines after Air New Zealand flagged its intention to exit the carrier through the sale of its $311 million holding.

The Kiwi flag-bearer sent Virgin shares into a 9.3 per cent free fall as it outlined a review of its 25.9 per cent stake in Australia’s second-biggest airline.

As part of the review, Air NZ said it was considering a partial or full sale of the holdings it has built up over the past five years.

Air NZ chairman Tony Carter said the airline no longer wanted a large minority equity position in Virgin and would instead direct the capital into its own growth ­aspirations. Air NZ has appointed First NZ Capital and Credit Suisse to manage the review and any possible selldown of its 914 million shares in Virgin.

The announcement of the ­review triggered the immediate resignation from Virgin’s board of Air NZ chief executive Christopher Luxon — who in the past has questioned Virgin’s profitmaking ability.

Should a selldown take place, analysts believe either Etihad, which has a 24.2 per cent stake in Virgin, or Singapore Airlines, with 22.8 per cent, would be the most likely buyer. Richard Branson’s Virgin Group owns about 10 per cent of the airline.

Creep rules now prohibit Etihad and Singapore from increasing their stakes in Virgin by more than 3 per cent every six months. But industry sources say Foreign Investment Review Board approval for a full takeover would not be an ­impossible hurdle as few restrictions exist to prohibit foreign companies from fully owning domestic carriers, as Sir Richard’s Virgin Group once did.

“This could trigger a full takeover of the company,” said Citi analyst Anthony Moulder.

“Instead of creeping, there could be a situation where Etihad or Singapore just take Air New Zealand’s stake and with it full control of the company.

“Another option would be for another carrier, most likely a ­regional Asian or Chinese airline, to join the party. But that would likely cause headaches for Singapore Airlines, which would probably object to such a situation.”

CAPA Centre for Aviation analyst Will Horton said any move by Etihad or Singapore to boost their stakes in Virgin could trigger a battle for the airline.

“Both would be concerned about the other gaining control,” Mr Horton said. “That could curtail or end Virgin’s partnership with one of them. Etihad and Singapore are competitors, not with complete overlap, but both making a big play in the Australia-Europe market. I assume Etihad or Singapore would consider a big move. But Air NZ would probably prefer Singapore as their interests are more aligned.”

A third option would be the sale of Air NZ’s 914 million shares to the broader market.

“There would probably be some appetite at these levels, or even a discount to these levels, but we really need Virgin management to come out and articulate how they see the year playing out before investors can start thinking about buying in,” Mr Moulder said.

Such a move would be a boost for Virgin as it would increase the liquidity of its shares.

Both Etihad Airways and Singapore Airlines declined to reveal if they had any desire to pick up Air NZ’s stake if it was sold, but both said they remained committed to Virgin.

At yesterday’s prices, Virgin had a market capitalisation of $1.2 billion.

“Etihad Airways has an enduring commitment to the Australian market and to providing choice, competition and quality air travel to Australian consumers,” an Etihad spokesman said. “We fully support Virgin Australia’s strategy and management team. Our relationship has enabled both airlines to significantly improve network reach and to deliver strong revenues from code share operations.”

The investment has not been a great one for Air NZ, which, since 2011, has ploughed more than $500 million into Virgin, including $386m in equity (at an average buy in price of 42.3c a share) and a recently announced $131m loan to the airline.

Air NZ’s announcement to review its stake hurt its investment even more as shares in Virgin plummeted 9.3 per cent and wiped $40m worth of value from its holding.

The review also comes just a week after Air NZ, Singapore Airlines and Etihad agreed to hand over a 12-month, $425m loan to Virgin to give its balance sheet some breathing room as the carrier undertakes a wideranging review of its capital structure as it looks to boost its dwindling cash pile.

The capital review will mainly focus on how Virgin, after an intense period of investment to transform its business to battle Qantas’s dominance of the corporate and business markets, can find new sources of funding to continue growing.

The need to review Virgin’s structure comes after an intense period of transformation for the company that helped it underpin a strong half-year result and put it back on the path to profit.

But that turnaround has come too late for Air NZ, according to Mr Horton, who said it made more sense for the Kiwi carrier to pursue better returns on its capital by investing in its own business.

“Air NZ is already frustrated by having limited influence. Virgin may not want Air NZ to say performance needs to improve, but Air NZ has a responsibility to its shareholders regarding Virgin,” he said.

“Virgin effectively has no other choice for a trans-Tasman partner, so equity is not needed to secure that partnership. For Etihad and Singapore, the stakes are higher and they have more cash than Air NZ to muscle for their outcome.”