Air NZ sells Virgin stake to China’s Nanshan Group

Air New Zealand has all but pulled out of Virgin Australia after selling a 19.98 stake to China’s Nanshan Group.

Virgin will have greater exposure to China after the move by Nanshan.

The prospect of a full takeover of Virgin Australia has all but disappeared after Chinese conglomerate Nanshan Group emerged as the surprise buyer of Air New Zealand’s stake in the airline.

Under the deal, Nanshan — a privately owned Chinese conglomerate with interests in aluminium and property as well as its own Qingdao Airlines — will pay Air New Zealand 33c a share for its 19.98 per cent holding in Virgin, valued at about $260 million.

The deal, negotiated in Sydney and signed in Auckland in the early hours of yesterday morning, means Air NZ will be left with a 2.6 per cent stake in Virgin.

The transaction puts an end to a 10-week sales process of Air NZ’s majority stake that was triggered when the airline’s chief executive, Christopher Luxon, dramatically resigned from the Virgin board after he unsuccessfully tried to oust the airline’s boss, John Borghetti.

The sale has also put an end to the possibility of Singapore Airlines — another major shareholder with a stake of 23.1 per cent — swooping on Air NZ’s stake and launching a full takeover of Virgin.

“There was some expectation in the market that Singapore would be the obvious buyer of Air NZ’s stake, but the fact that they didn’t means the major shareholders are probably happy to play along with their respective stakes without control,” Citi analyst Anthony Moulder said.

“Singapore should be happy with the arrangement because it’s not a hub carrier who has come in and would potentially have diverted traffic. Taking passengers to and from China is also not a competitive threat to Etihad.”

Nanshan is the second Chinese conglomerate in as many weeks to become a major shareholder in Virgin after HNA Group struck a $159m deal to take a 13 per cent stake in the airline through the placement of new shares.

That HNA deal will dilute Virgin shareholders’ stakes while Nanshan’s addition will complicate an already crowded register that counts Singapore Airlines, Etihad and Virgin Group.

Virgin agreed to give HNA a board seat as part of its deal and it is understood that Nanshan will also seek board representation at the Virgin table.

Sources say Virgin’s board and management had been aware of the deal between Nanshan and Air NZ since late last month, with Mr Luxon and Mr Borghetti having been in touch in the past week to discuss the transaction.

However, it is not known if HNA — which only finalised its deal with Virgin last week — was made aware that another Chinese company would be joining the airline’s share register with a major stake.

Virgin and Air NZ both declined to comment on specifics of the deal but the Kiwi flag carrier’s chairman, Tony Carter, said the sale would allow the airline to focus on its own growth opportunities while still continuing its longstanding alliance with Virgin Australia on the trans-Tasman network.

The addition of Nanshan to the Virgin register and the intention of HNA to increase its holding to 19.9 per cent means the Australian airline could soon be 40 per cent-owned by Chinese companies.

The strong representation means Virgin will have greater exposure to China, its burgeoning middle class and the 1.2 million Chinese tourists who fly to Australia each year.

“I don’t get a sense that the two Chinese shareholders will work together, but there will be a vested interest to drive businesses to and from China,” Mr Moulder said. “That should please John Borghetti given the growth opportunity that is China inbound and Australian domestic travel.

“So there are some clear positives to come from this even if it means Virgin still has to execute its strategy and spend marketing dollars to get that share of Chinese travellers.”

The flurry of activity on Virgin’s share registry comes as the airline continues to work through a wide-ranging review of its capital structure.

Analysts say it could need as much as $1 billion to repair its balance sheet, which has been weighed down by expenses to upgrade and refit its fleet of aircraft to better compete with Qantas for big-ticket corporate and government customers.

It is understood Nanshan Group intends to support the outcome of that review.

“We look forward to meeting with Nanshan Group over the coming weeks to discuss the proposed acquisition,” Virgin said.

Deutsche Bank analyst Matt Peek said Air NZ’s sale would come at a significant loss as the airline paid close to $NZ480m acquiring the holding.

But he added that selling the stake at a premium to the current market price was a “good outcome”.

News of the sale sent shares in Virgin up 3.6 per cent to 29c. Shares in Air NZ rose 2.9 per cent to $2.12.

“The HNA Group placement highlighted the risk of incoming cornerstone investors getting set via new equity (beneficial to both Virgin and the incoming investor) rather than buying Air NZ’s stake, so this sale at a tidy premium to market price is a good outcome,” Mr Peek said.