06-Jun-2006 10:15 AM
Cathay Pacific's reported 10 bln hkd offer for Dragonair 'reasonable' - analysts
Analysis
HONG KONG (XFN-ASIA) - The reported Cathay Pacific Airways Ltd's purchase offer of 10 bln hkd for stakes in Dragon Airlines Ltd (Dragonair) that it does not already own is "reasonable," relative to valuations for other airlines currently operating in China, analysts told XFN-Asia.
Dragonair is currently owned 17.79 pct by Cathay Pacific, with an additional 7.71 pct held by Cathay Pacific parent Swire Pacific Ltd.
A bid chunk of 43.29 pct is owned by China National Aviation Company Ltd (CNAC), 28.5 pct is held by CITIC Pacific, and 2.71 pct by unnamed parties.
Zeno Tse, an aviation analyst at China Everbright Research Ltd, said Cathay Pacific's offer of about 10 bln hkd to take over Dragonair translates to about 1.2 times book value, lower than the estimated 1.4 to 1.5 times book for Air China, just slightly over 1.2 times book for China Eastern Airlines, and about 1.0 to below 1.0 times book for China Southern Airlines.
"In the past, Dragonair was valued at about 11 bln hkd. Cathay Pacific's reported offer of 10.0 bln hkd therefore, looks reasonable compared to previous valuations for Dragonair," he said.
The prospective emergence of Cathay Pacific as the largest airline in the Asia-Pacific if the takeover bid for Dragonair proceeds, and the chance of expanding its presence in mainland China through Dragonair, will also justify its price offer for Dragonair, he said.
"In terms of fleet size, Cathay will probably emerge as Asia-Pacific's largest after this transaction. And Cathay will immediately gain access to Dragonair's lucrative Hong Kong-Shanghai route," he said.
The Standard newspaper reported that Cathay Pacific is in an advanced stage of talks to buy out the stakes in Dragonair held by CNAC, CITIC Pacific and Swire Pacific through a combination of cash and shares.
Brook McConnel, president of South Ocean Management, said Cathay Pacific's purchase offer may look "generous" but not "excessive."
"At face value, some analysts may view Cathay Pacific's purchase offer as aggressive. But if it is seen in the context of China being one of the world's fastest-growing aviation markets, I believe the price is reasonable," he said.
He said China's inbound and outbound aviation traffic is growing robustly, and Cathay Pacific is bound to benefit in a significant way by taking over Dragonair and achieving economies of scale and synergies from the combined operations into and out of China.
(1 usd = 7.8 hkd)