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Cathay close to takeover of rival Dragonair

Written by: Staff

HONG KONG, June 5: Hong Kong's main airline, Cathay Pacific Airways Ltd., was close to announcing a takeover of China-focused rival Dragonair in a deal reported to be worth US$1.3 billion, sources familiar with the matter said.

The long-anticipated buyout would give Cathay the profitable routes to the fast-growing mainland China market it has long sought and create a formidable rival for local airlines such as China Southern Airlines Co. Ltd. and China Eastern Airlines Corp. Ltd.

''Simple logic is Cathay needs a network into China, Dragonair's got one,'' said CLSA aviation analyst Kevin O'Connor, who has a ''sell'' rating on Cathay. ''The devil will be in the details.'' Cathay was in advanced talks to buy out the stakes in Hong Kong-based Dragonair held by Swire Pacific, CITIC Pacific and China National Aviation Co. Ltd. (CNAC) through a combination of cash and shares, the sources said, confirming a report in Hong Kong's Standard newspaper.

The buyout could be worth HK$10 billion (US$1.3 billion), the newspaper quoted a source close to the talks as saying.

A source familiar with the situation told Reuters a deal could be announced this week but could not confirm a value.

Shares in Cathay, Air China, CITIC Pacific, Swire Pacific and CNAC were all suspended on Monday after the newspaper report.

A stock exchange statement said Cathay's shares were suspended pending a company announcement under rules on disclosable transactions. Similar statements were released on behalf of the other parties.

A spokeswoman for Beijing-controlled Air China Ltd., which holds 69 percent of CNAC (HK), told Reuters the company considered the newspaper report to be price-sensitive, so it had applied for a trading suspension pending clarification.

Cathay and unlisted Dragonair, which flies to 23 cities in mainland China, declined to comment.


Cathay is the dominant carrier in Hong Kong but has long been frustrated by its inability to win routes into China, in particular to Shanghai. Cathay's passenger routes to mainland China are limited to Beijing and Xiamen.

''Assuming the Chinese government allowed Cathay to lay claim to the operating rights of Dragonair, it would be a huge boost for Cathay,'' said Richard Pinkham, Singapore-based consultant at the Centre for Asia Pacific Aviation. ''It's all about China.'' The fact that Cathay is ultimately controlled by UK-based John Swire&Sons Ltd., a legacy of Hong Kong's days as a British colony, has been seen as a hindrance in its efforts to win a meaningful share of the booming mainland China market.

CITIC Pacific had said in April that it might cut its stake in Cathay as part of a plan to adjust a complex airline holding structure that also involves Air China and Dragonair.

''The rumours of Cathay buying Dragonair have been going on for a while and it seems the facts will come out shortly,'' said Damien Horth, head of Asia transport research at UBS.

Cathay holds a 17.8 percent stake in Dragonair, and its parent, Swire, has a separate 7.71 percent holding.

CNAC is the largest shareholder of Dragonair, owning 43.3 percent, while CITIC Pacific has 28.5 percent. The remainder is held by other investors.

Cathay Pacific holds a 10 percent stake in Air China.

The Standard report said Air China was likely to acquire shares in Cathay as part of the deal, becoming its third-largest shareholder after Swire and CITIC Pacific.

Shares in Cathay have fallen 4.4 percent since the start of the year on high global fuel prices, lagging a 7 percent gain in the benchmark index With a market capitalisation of US$5.64 billion, it is the world's eighth-most valuable airline.


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