Cathay Pacific to Buy Out Dragon Airlines

The Associated Press
Friday, June 9, 2006; 12:48 AM

HONG KONG -- Cathay Pacific Airways Ltd. said Friday it will acquire full ownership of Hong Kong Dragon Airlines Ltd. and double its stake in Air China in a deal aimed at giving Cathay a huge competitive boost in the world's fastest growing aviation market.

The HK$8.22 billion ($1.05 billion) deal ends two years of complex negotiations and involved five key players in the Hong Kong-China aviation industry.

The deal "makes the world's most significant aviation alliance," said Christopher Pratt, chairman of Swire Pacific Ltd., the parent of Cathay _ Hong Kong's biggest airline.

Pratt added that the deal wouldn't be completed until it's approved by shareholders in the next two months. "We are absolutely confident the deal will go ahead," he said.

Cathay Pacific said in a published notice it would pay Dragon Airlines shareholders HK$820 million ($105.6 million) in cash, with the rest of the acquisition funded by new Cathay shares.

Cathay also said it would pay HK$4.7 billion ($605.5 million) to increase its stake in Air China by another 10 percent, for a 20 percent stake.

Pratt pointed out it's highly unusual for a non-mainland Chinese company to have such a big stake in one of China's biggest brands.

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

Air China will pay HK$5.39 billion ($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, Air China's chairman.

Cathay said that Dragonair, as the company is known, will keep its own brand for six years as part of the deal. Cathay previously held 17.8 percent of Dragonair.

Also, the shareholding of Cathay will change, with Swire Pacific seeing a decrease in its stake 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.

Currently, Cathay can offer passenger service into just two mainland cities, Beijing and the southeastern city of Xiamen, and 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.

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.

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

Trading in the Hong Kong-listed shares of the companies involved in the talks _ Cathay, Air China, Swire, CNAC and CITIC Pacific _ have been suspended since Monday after a Hong Kong newspaper, the Standard, reported the buyout was imminent.

© 2006 The Associated Press