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Joseph Lo

Conglomerate is continuing co-operative discussions which may lead to cross-shareholding deal and sale of Dragonair

Cathay Pacific Airways and parent Swire Pacific confirmed progress in wide-ranging talks with Air China, holding out the possibility of a cross-shareholding agreement and the sale of Dragonair.

The  carrier was responding to a report yesterday in the South China Morning Post that the two airlines were in advanced negotiations whose possible outcomes included a Cathay takeover of Dragonair followed by Cathay's absorption into the Air China Group.

While Swire stated its commitment to remain Cathay's principal shareholder 'for the long term', it confirmed   continuing co-operative discussions with Air China and said these 'necessarily involve Dragonair'.

Air China parent China National Aviation Holdings (CNAH) controls a 43.29 per cent stake in Dragonair through its Hong Kong-listed subsidiary, while Swire and Cathay jointly control 25.5 per cent.

'Cathay Pacific and Air China have made progress in exploring opportunities for further co-operation, including in relation to the Hong Kong-China aviation market,' Cathay said.

According to executives close to the discussions, Cathay and Swire are keen to gain majority control of Dragonair. In return, it is understood that Air China would demand a stake in Cathay. A deal could also see Cathay increase its stake in Air China, in which it already holds 10 per cent.

Swire Pacific said in its statement that it 'does not intend to do anything which would require a general offer to be made for the shares of Cathay Pacific under the Hong Kong Code on Takeovers and Mergers ... [and] does not intend to become the principal shareholder of Air China'.

Under the takeover code, the acquisition of more than 30 per cent of the shares in a locally listed company requires that the buyer  extend that  offer to all registered shareholders.

In November last year,  Cathay  agreed to pay about  $2.91 billion for a 10 per cent stake in Air China before  the mainland carrier's listing in Hong Kong, marking the first substantial foreign investment in a leading  mainland airline.

According to sources close to the situation, that investment was considered just a starting point for Cathay, whose priority remains full integration with the mainland aviation market. Cathay's access to the mainland is restricted while Dragonair dominates cross-border air routes. Dragonair flies  to 21 destinations on the mainland, and Cathay just three.

Swire and Cathay are two of the most enduring symbols of Hong Kong's colonial past.

Any exchange that netted the Air China group a sizeable stake in Cathay would mark a significant shift in the balance of corporate power in Hong Kong, akin to PCCW's 2000 acquisition of Hongkong Telecom from Cable & Wireless.

Red chip Citic Pacific already holds 25.51 per cent of Cathay.

Similarly, a significant expansion of Cathay's investment in Air China would  enhance its strategic position in what should be its most important market, and also provide China's national airline   access to Cathay's management expertise.

News of an impending deal involving Cathay, Air China and their parent firms sent the companies' share prices soaring yesterday. Cathay rose   4.89 per cent to   $15, while Swire Pacific added  2.69 per cent to   $66.75.

Air China rose  3.53 per cent to  $2.925. CNAH's Hong Kong-listed arm, CNAC, jumped  11.11 per cent to  $1.80.

Air share

Swire plans to be Cathay's main shareholder 'for the long term'

Deal could see Cathay raise its stake in Air China

Swire does not intend to be the main shareholder of Air China



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Cathay Pacific

Swire confirms talks with Air China