What’s Virgin’s new destination?

John Borghetti now has a share register which would cause most bosses nightmares, but he will be quietly celebrating. Picture: Hollie Adams/The Australian.

China Inc has emerged with a 40 per cent stake in Virgin Australia and should consolidate its position when the airline unveils a circa $900 million capital raising in the next week or two.

The capital raising is expected to further shrink the Virgin free float, as smaller investors are less likely to take up their rights, which are then open to the strategic owners to buy.

Both Virgin’s selected Chinese partner HNA, and newcomer Nanshan have indicated they will support the capital raising, which is expected to be formally unveiled early next week.

As things stand once they take up their promised holdings, HNA and Nanshan will control 20 per cent each and will both hold board seats at Virgin.

The company stressed its independence but no matter which way you look at it Virgin is now controlled by China Inc, which can gobble up more by exercising the 3 per cent share creep every six months.

Whether it does remains to be seen and it was notable that Nanshan paid a three cents a share premium to the price paid by HNA, which secured its position for 30 cents a share.

At the very least one can presume that while independent companies they are unlikely to be violently opposed to each other in terms of future actions.

Air New Zealand would have hoped to get a higher price but once the Virgin placement was made last month that destroyed those ambitions.

Virgin boss John Borghetti now has a share register which would cause most bosses nightmares but he will be quietly celebrating today at the department of Air New Zealand as a major holder in the group.

Air New Zealand is understood to have acquired its stake for around $459 million which means with the sale netting $232.6m it will post a $227m loss on the sale.

Its chief, Chris Luxon, reportedly tried to oust Borghetti in a failed coup, which left Singapore (20.1 per cent) and Etihad (21.8 per cent) as the major shareholders.

Richard Branson controls 8.7 per cent.

Just whether Branson would take up his rights is unclear.

The Chinese may want to ensure they stay below 20 per cent to avoid the need for any FIRB approval.

The timing of the proposed capital raising was thrown into some doubt in the wake of the Air New Zealand sale as Virgin might want to work through the options.

On one level it is simply a change in personnel in the consortium running Virgin, and a much easier one at that given the trouble relationship with Air New Zealand.

But it does change the rules of the game now two Chinese holders speak for 40 per cent of the company.

Nanshan is a privately owned conglomerate which owns a small airline, Qingdao Airlines, while HNA is while also a conglomerate a much bigger player in the field. It runs several airlines, a leasing company and a string of hotels, among other assets.

As of December 31 Virgin had $543.7m in cash, down $175m in the previous six months, and was highly leveraged with $5.8 billion in assets and $4.9bn in liabilities.

Company chairwoman Elizabeth Bryan is in no hurry to relinquish her position as a publicly listed airline chair, but now the Chinese are in a position where they can take the decision out of her control by creeping up the register.

The company has a free float today of 15 per cent but when the capital raising is done that will likely fall.

Borghetti at least is in the fortunate position of having new shareholders prepared to back his stewardship of the airline.