March 27, 2019 / 12:40 AM / a year ago

Cathay Pacific to enter low-cost market by buying HNA's HK Express

SINGAPORE (Reuters) - Cathay Pacific Airways said on Wednesday it had agreed to buy Hong Kong Express Airways Ltd from cash-strapped Chinese conglomerate HNA Group for HK$4.93 billion ($628 million), giving it a foothold in the fast-growing budget travel market.

FILE PHOTO: Hong Kong's Cathay Pacific Airways Airbus A330-300 passenger plane takes off near a Taiwanese national flag at Taoyuan International Airport, Taiwan August 6, 2018. REUTERS/Tyrone Siu

A lack of slots at Hong Kong International Airport until an expansion is completed in 2024 had constrained Cathay’s ability to follow peers like Singapore Airlines Ltd and Qantas Airways Ltd and set up its own budget brand.

Cathay said it would continue operating HK Express as a standalone carrier using a low-cost business model.

The purchase price comprises HK$2.25 billion of cash and HK$2.68 billion of non-cash consideration through promissory loan notes, Cathay said in an statement to the Hong Kong Stock Exchange.

HK Express reported a HK$141 million net loss in 2018 and had a net asset value of HK$1.12 billion, Cathay said.

The transaction was expected to be completed on or before Dec. 31, it said, although it added that lawyers for a shareholder of an intermediate holding company of HK Express had written to Cathay indicating an intention to contest the agreement.

Cathay, which did not name the shareholder, said it had the right to terminate the deal if proceedings were commenced to prevent the transaction.

HK Express said it was not involved in the shareholder-level negotiations of the deal and had no comments on the issue, while HNA declined to comment.

Cathay shares, which had risen as much as 3.4 percent in early trade on Wednesday, later reversed gains to trade as much as 2.9 percent lower.

Daiwa analyst Kelvin Lau told clients that the deal appeared “costly” and it could take years for cost-savings to emerge from owning the low-cost carrier as well as its other operations.

Others, however, said it made strategic sense for Cathay.

“It seems like a good deal given the value of the slots and the strategic importance of fast-tracking a low-cost carrier, multi-brand strategy and preventing a competitor from making a move in its home market,” said CAPA Centre for Aviation Chief Analyst Brendan Sobie.

“But a proper valuation is hard to figure out given the debts and complex structure of the HNA Group.”

HK Express has 24 Airbus SE A320 jets and the acquisition would increase Cathay’s share of seat capacity in Hong Kong to 51 percent from about 46 percent, according to CAPA data.

Cathay Chief Executive Rupert Hogg told Reuters last week he believed low-cost airlines met a “unique market segment” not captured by the Hong Kong carrier at present, and helped to stimulate new travel demand.

Cathay is in the third year of a three-year turnaround plan designed to cut costs and boost revenue to make it more competitive against Chinese and Middle Eastern rivals, as well as low-cost carriers.

Embattled HNA Group is more than a year into the process of unwinding a $50 billion acquisition spree that at its peak netted the company stakes in banks, fund managers, hotels, property and airlines, among other assets.

It also owns full-service carrier Hong Kong Airlines, which is not part of the deal with Cathay.

Reporting by Jamie Freed in Singapore; Additional reporting by Donny Kwok in Hong Kong; Editing by Stephen Coates and Muralikumar Anantharaman

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