23-Jun-2006 10:56 AM
Deal of the decade (cont) Air China to purchase remainder of CNAC
Analysis
Sydney (CENTRE FOR ASIA PACIFIC AVIATION) - Air China has moved quickly to answer one of the open-ended questions of the 08-Jun-06 ownership Restructuring Agreement: what is the future of CNAC? At issue was whether Air China was prepared to invest further to back the deal and the associated Operating Agreement for closer cooperation with Cathay Pacific. That it has done so provides strong support for the completion of the overall deal. CNAC could be delisted as early as 4Q06.
At the heart of Air China's decision was accessing CNAC's stake in Cathay, which would be 7.3% upon completion of the Restructuring Agreement - in addition to the 10.2% Cathay stake Air China will acquire from CITIC Pacific and Swire Pacific Limited, at HKD13.50 per Cathay share. Air China stated it wishes to rationalise its shareholding in Cathay. With the CNAC acquisition, Air China directly controls a 17.5% shareholding in Cathay, allowing it greater influence over Cathay and to account for a higher percentage of Cathay's financial results.
The move would also bring CNAC's operating units - from catering and maintenance to ground handling and Air Macau (including its controlling interest in budget airline Macau Asia Express Ltd) under Air China's direct control. (CNAC's 100%-owned Macau unit - the holder of the Macau assets - is likely to be retained, to ensure Air Macau's bilateral rights are not affected).
Air China's decision also confirms the HKD10.0 billion valuation placed on Dragonair - representing 33.3 times Dragonair's reported earnings of HKD300.4 million for the year ended 31-Dec-05. This valuation may be generous, given the rhetoric in all the joint statements about Dragonair's challenged outlook and deteriorating competitive position. For CNAC and its shareholders, the offer reflects a premium of approximately 71.8% over the IPO price of HKD1.63 per share and a premium of approximately 65.9% over the average closing price over the past six months.
Air China's offer is a pragmatic solution to the currently complex shareholding structure. It helps anchor the long term advantages of the restructure.
(Note: The Centre will next week publish a more detailed report on the implications of the Air China-Cathay-Dragonair deal).
The move would also bring CNAC's operating units - from catering and maintenance to ground handling and Air Macau (including its controlling interest in budget airline Macau Asia Express Ltd) under Air China's direct control. (CNAC's 100%-owned Macau unit - the holder of the Macau assets - is likely to be retained, to ensure Air Macau's bilateral rights are not affected).
Air China's decision also confirms the HKD10.0 billion valuation placed on Dragonair - representing 33.3 times Dragonair's reported earnings of HKD300.4 million for the year ended 31-Dec-05. This valuation may be generous, given the rhetoric in all the joint statements about Dragonair's challenged outlook and deteriorating competitive position. For CNAC and its shareholders, the offer reflects a premium of approximately 71.8% over the IPO price of HKD1.63 per share and a premium of approximately 65.9% over the average closing price over the past six months.
Air China's offer is a pragmatic solution to the currently complex shareholding structure. It helps anchor the long term advantages of the restructure.
(Note: The Centre will next week publish a more detailed report on the implications of the Air China-Cathay-Dragonair deal).