The HK$4.9 billion deal launches the flagship airline's voyage into low-cost carrier supplies

Cathay Pacific Airways - Hong Kong's flag carrier - has agreed to fork out HK$4.93 billion ($628 million) to acquire local budget airline HK Express from HNA Group, giving it control of three of the city's four airlines.

Cathay will purchase 315.06 million, or 100 percent, ordinary shares of HK Express, and the latter will become a wholly owned subsidiary on completion of the transaction on or before Dec 31 this year, Cathay said on Wednesday.

The deal will be paid in HK$2.25 billion cash, with the remaining HK$2.68 billion to be settled through the issuance and novation of promissory loan notes.

As of the end of last year, Cathay reported a HK$2.35 billion profit after back-to-back losses, and held liquid funds of HK$15.32 billion.

Following the acquisition, Cathay will own three of the SAR's four airlines in operation and expand to providing budget carrier services.

"The transaction is expected to generate synergies as the businesses and business models of Cathay Pacific and HK Express are largely complementary. The transaction represents an attractive and practical way for the Cathay Pacific Group to support the long-term development and growth of its aviation business and to enhance its competitiveness," Cathay said.

It will continue to operate HK Express as a sole airline using the low-cost carrier business model in Hong Kong.

"The HK$4.9 billion acquisition of HK Express largely aligns with Cathay's overarching expansion goals, in our view. Cathay will hold approximately 45 percent of aircraft movements at Hong Kong International Airport following the acquisition," Bocom International transportation analyst You Luya told China Daily.

"More importantly, HK Express allows Cathay to enter near seamlessly into the Asian LCC (low-cost carrier) market, a wise move at a time when competitions between premium carriers have reached a boiling point," You said.

"Strategically, we think the acquisition of HK Express will help enhance Cathay's leadership in its home base of Hong Kong and alleviate pricing competition. Valuation-wise, however, we think it looks high based on the disclosed consideration of HK$4.93 billion versus net assets of HK$1.1 billion for the target firm," said Morgan Stanley analyst Edward Xu.

Launching its first flight in 2013, HK Express had a fleet of 24 Airbus 320/321 aircraft flying to 25 destinations in Asia, including Bangkok, Seoul and Tokyo. Last year, it reported a net loss of HK$141 million.

Jefferies Financial Group sees the acquisition as positive, given different passenger segments as HK Express is a low-cost carrier, Cathay's sufficient cash to fund the cash payment, and the full ownership of HK Express.

Cathay's share price sank 2.49 percent to close at HK$13.34 on Wednesday, while the benchmark Hang Seng Index edged up 0.56 percent, or 161.34 points, to 28,728.25.

joycesun@chiernadailyhk.com

(HK Edition 03/28/2019 page4)