Air China takes a big chunk of Cathay

Air China, the nation's biggest international carrier, offered HK$3.23 billion ($675 million) for complete control of a Hong Kong unit, to almost double its stake in Cathay Pacific Airways, Asia's second-most profitable airline.

Shareholders in the China National Aviation unit, or CNAC, will get HK$2.80 a share in cash, a 39 per cent premium to the stock's three-month average. The purchase will give Air China a 17.5 per cent stake in Cathay Pacific, the Beijing-based airline said yesterday.

The buyout will expedite a deal agreed to earlier this month for Cathay to buy Hong Kong Dragon Airlines, making it the dominant foreign-controlled airline in China. Closer ties with Cathay will help Air China compete with domestic competitors including China Southern Airlines.

"Privatisation will help streamline the company structure and save costs," said Louis Wong, at Phillip Securities.

"With Air China being listed itself, there is no need for CNAC to continue its listed status."

Cathay said on June 9 it would pay HK$8.22 billion to buy Dragonair to expand its network in China.

Dragonair flies to 23 Chinese cities, more than any other Hong Kong-based carrier. Cathay currently only has passenger flights to Beijing and Xiamen in the southeast and cargo flights to Shanghai.

Air China's shares rose 3.5 per cent to HK$3 in Hong Kong. CNAC shares rose 3.8 per cent to HK$2.725.

Air China already owns 68 per cent of CNAC, a holding company, which is the largest shareholder of Dragonair. CNAC agreed to sell its stake in Dragonair for HK$4.33 billion in cash and stock, giving the company a 7.3 per cent stake in Cathay.

Air China will buy 10.2 per cent of Cathay for HK$5.39 billion, while the Hong Kong-based carrier will pay HK$4.07 billion to double its Air China stake to 20 per cent.

Cathay and Air China plan to split sales and costs on common routes between Hong Kong and China, and to sell each other's tickets.

CNAC also has a 51 per cent stake in Air Macau.

- BLOOMBERG