China’s HNA to nab 13pc stake in Virgin Australia

Virgin’s tie-up with China’s HNA group could anger Air NZ as it continues to eye an exit from its stake in the carrier.

China’s largest private airline operator is set to pay $159 million to claim a 13 per cent stake in Virgin Australia, in a deal that could anger Air New Zealand as it looks to divest its stake in Australia’s second largest carrier.

The ASX-listed firm announced the equity placement this morning in conjunction with a heads of agreement that will see HNA Group and Virgin introduce direct flights between China and Australia.

The co-operation between the two firms will extend to code-sharing, frequent flyer programs and lounge access.

The $159m placement will come at a price of 30 cents a share, a 7 per cent premium to Virgin’s last traded price of 28c.

“This is a big coup,” Virgin Australia chief executive John Borghetti said, adding it would be positive for profitability.

“For such a large company to recognise the potential of Virgin Australia – and Australia generally – is enormous.”

The codeshare flights to China will likely run daily, Mr Borghetti said, with Beijing and Hong Kong flagged as likely destinations.

The back end of financial year 2017 is currently the target for Chinese operations to begin, while over time Virgin’s Velocity frequent flyer members will receive reciprocal rights for HNA-backed airlines such as Hainan.

The placement to HNA comes independent of Air New Zealand’s bid to exit the Virgin register, with the NZ giant declaring an intention to offload its 25.9 per cent stake in March.

Virgin Group founder Richard Branson told The Australian this week that a deal for the Air NZ stake was imminent, with Singapore Airlines and a mystery airline believed to be in the race for it. It is unclear whether HNA sought to enter the register via a deal with Air NZ, although it has been linked on numerous occasions.

HNA may still be looking to claim Air NZ’s position — which will be diluted to approximately 22.5 per cent — although it would require Foreign Investment Review Board approval should its stake rise above 20 per cent.

In the meantime, Air NZ is likely to be aggrieved with the arrangement given it both dilutes its stake and puts a short-term cap on any potential sale price.

In a media conference discussing the deal, Mr Borghetti said the agreement with HNA was not discussed with Air NZ.

“I don’t know [their view],” he said.

“Air New Zealand is not on the board and this was a board decision.”

He added Virgin had no input into the ongoing exit strategy of Air NZ.

Other major shareholders will also be diluted, with Singapore Airlines’ stake moving from around 23.1 per cent to 20.1 per cent, Etihad’s sliding from 25.1 per cent to 21.8 per cent and Virgin Group’s position weakening from 10 per cent to 8.7 per cent.

It ensures a more complicated register of major aviation names with contrasting interests and leaves just 13.9 per cent of the company outside the hands of the five big shareholders.

HNA controls China’s fourth largest airline Hainan Airlines and has stakes in several other carriers across the globe. The broader conglomerate is a Fortune 500 company with hotels and logistics investments among its portfolio, while a stake in Uber serves as its highest-profile deal.

The group will be granted the option to nominate one director to the board of the Australian airline and intends to lift its stake to 19.99 per cent “as quickly as practical”, Mr Borghetti added.

The strategic alliance will require approval from competition authorities in both Australia and China, while the placement is seen unlikely to need support from local regulators.

At 1.35pm (AEST), Virgin stock traded up 5.4 per cent at 29.5c.