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Cathay's budget-airline deal may add HNA surcharge

Cathay Pacific's budget-airline deal may come with an HNA surcharge. Buying Hong Kong Express for US$630 million is a sensibly defensive move.

[SINGAPORE] Cathay Pacific's budget-airline deal may come with an HNA surcharge. Buying Hong Kong Express for US$630 million is a sensibly defensive move. One shareholder – possibly the target's own chairman – has threatened to fight the sale, however. That could raise the price for the buyer, and serves as a warning to others shopping at the ailing Chinese conglomerate.

After swinging from two years of losses to a profit in 2018, Cathay Pacific Airways is approaching the end of a three-year overhaul. Boss Rupert Hogg is now ready to join those he struggled to beat, snapping up the city's only low-cost carrier.

Having acquired Dragonair over a decade ago, Cathay will now control half of Hong Kong's capacity and have ample room to push into the discount segment already tapped by the likes of Singapore Airlines and Qantas. Only 12 per cent of the city's traffic is budget-oriented, according to consultancy CAPA, below the Asian average.

Unprofitable HK Express has not come cheap. The price tag amounts to more than four times book value, according to Daiwa analysts, while rivals like Air Asia trade at closer to one times. That misses the potential, however. In a hub where capacity cannot keep up with passenger growth, US$7 billion Cathay wants more slots and to capitalise on Hong Kong's planned third runway. It also wants to prevent a competitor from muscling in.

Buying from HNA, a sprawling group which owns Hong Kong Airlines and others, comes with its own quirks. Indeed, the deal's fine print rattled investors. Cathay said an unnamed shareholder of an intermediate holding company is contesting the transaction. HK Express Chairman Zhong Guosong is the investor in question, according to Chinese daily Caixin.

Mr Zhong is also an indirect owner of HNA and involved in a separate debt dispute with it. Such complexities have arisen before. In 2017, for example, one HNA dealmaker who also served as a board member at some of its companies said he was holding a stake in the parent as a favour.

Ultimately, Mr Zhong may prove more of an irritant than an obstruction. For other suitors of HNA assets, though, it's worth watching out for potential hidden fees before getting on board.


- Cathay Pacific said on March 27 it had agreed to buy low-cost carrier Hong Kong Express Airways from conglomerate HNA Group for HK$4.93 billion (S$850 million) in cash and non-cash considerations.

- The purchase price includes HK$2.25 billion of cash and about HK$2.7 billion in promissory loan notes.

- HK Express will operate as a wholly-owned subsidiary after the deal's completion, expected by the end of the year, Cathay said.

- It added that it had received notice from lawyers acting for a shareholder of an intermediate holding company that it intends to contest the deal. The shareholder is Zhong Guosong, the executive chairman of HK Express, Chinese newspaper Caixin reported, citing unnamed sources.

- Cathay shares initially rose on news of the sale on March 27, but closed down 2.5 per cent at HK$13.34.


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