Cathay Pacific To Buy Out Dragon Airlines

Cathay Pacific Airways Ltd. said Friday it will acquire the rest of Hong Kong Dragon Airlines Ltd. and double its stake in Air China to 20 percent in deals aimed at giving Cathay a huge competitive boost in China - the world's fastest growing aviation market.

Cathay said it would pay 8.22 billion Hong Kong dollars ($1.05 billion) for the rest of Hong Kong Dragon Airlines in a deal that would end two years of complex negotiations that involved five key players in the Hong Kong-China aviation industry.

Christopher Pratt, chairman of Swire Pacific Ltd., the parent of Cathay - Hong Kong's biggest airline, said the agreement marks "the world's most significant aviation alliance."

Dragonair's key turf is China, with more than 20 routes between Hong Kong and mainland cities. It also serves secondary destinations around Asia.

Currently, Cathay can offer passenger service into just two mainland cities, Beijing and the southeastern city of Xiamen, although it has lobbied unsuccessfully to serve the lucrative Hong Kong-Shanghai route.

Dragonair can fill in those gaps in Cathay's passenger route system, which has focused on long-haul flights to the Americas and Europe as well as regional flights into key Asia-Pacific business centers.

"The deal gave Cathay the fastest and most direct way of entering the Chinese market," said Alan Lam, an analyst at Guotai Junan Securities Ltd. "This will lead to synergies, thus lowering costs by eliminating some flights on routes served by both airlines."

Pratt said that the alliance wouldn't be a monopoly because Cathay Pacific and Dragonair have few overlapping routes. "This is in no sense anti-competitive," he said.

The deal is subject to shareholder approval, expected in the next two months. "We are absolutely confident the deal will go ahead," Pratt said.

Cathay's shares soared 7 percent to 13.85 Hong Kong dollars ($1.78) on Hong Kong's stock exchange. Trading in its shares had been suspended since Monday when the deal was reported by a Hong Kong newspaper.

Cathay Pacific said it would pay Dragon Airlines shareholders 820 million Hong Kong dollars ($105.6 million) in cash, with the rest of the acquisition price paid in new Cathay shares. Cathay already owned a 17.8 percent of the airline.

Cathay also said it would pay 4.7 billion Hong Kong dollars ($605.5 million) to increase its stake in Air China, one of China's biggest brands, by another 10 percent to a 20 percent total, a rare level of ownership for a non-mainland Chinese company.

"Air China is one of the few iconic mainland Chinese brands and this makes this deal very special," Pratt said.

In turn, Air China will pay 5.39 billion Hong Kong dollars ($694.4 million) for 10.16 percent of Cathay, and the two carriers will team up to form a Shanghai-based cargo airline.

"The quality of operations for the two companies will improve substantially," said Li Jiaxiang, chairman of Air China.

Cathay said that Dragonair, as the company is known, will keep its own brand for six years as part of the deal.

As part of the deal, the shareholding of Cathay will change, with Swire Pacific's stake falling to 40 percent from 46.3 percent.

Chinese conglomerate CITIC Pacific Ltd. will see its stake in Cathay decrease to 17.5 percent from 25.4 percent.

China National Aviation Co., which has been Dragonair's parent, will now hold 7.34 percent of Cathay. CNAC previously didn't have any stake in Cathay.

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