Air New Zealand Increases Interest in Virgin Australia

Air New Zealand has increased its relevant interest in Australian-based airline Virgin Australia from 14.99 percent to 19.99 percent. The increased interest was acquired at 29.7 cents per share.

The increased interest is held through an equity derivative agreement with Deutsche Bank which gives Air New Zealand an economic interest in up to five percent of Virgin Australia subject to certain conditions. One of these conditions is that such purchase does not cause Virgin Australia to breach its foreign ownership cap of 49 percent specified in the Australian Air Navigation Act.

Under the agreement, Air New Zealand is guaranteed a minimum additional exposure of 3.5 percent and up to a maximum additional exposure of five percent. This would take Air New Zealand’s total exposure in Virgin Australia to 18.49 and 19.99 percent respectively.

The outlay for the minimum exposure of 3.5 percent will be A$23.0 million, while the outlay for the maximum five percent will be A$32.8 million.

Air New Zealand intends to work with Virgin Australia to bring its interest out of the derivative and into physical shares as soon as possible within the constraints of the foreign ownership cap.

Prior to entering into the equity derivative arrangement, Air New Zealand received Australian Foreign Investment Review Board approval to purchase up to 19.99 percent of Virgin Australia.

Air New Zealand Chief Executive Officer Rob Fyfe says there is no intention to make a takeover bid for Virgin Australia, something he confirmed to the Australian airline’s Chief Executive, John Borghetti, in a telephone call today.

“Our increased investment in Virgin Australia continues Air New Zealand’s strategy to develop scale and reach in this region. The trans-Tasman Alliance with Virgin Australia was the first step in this strategy, followed by our initial investment in January of this year. This increased investment demonstrates our continued belief in the strategy that Virgin Australia is pursuing and our confidence in the Virgin Australia management team to deliver this strategy” says Mr Fyfe.

“The trans-Tasman Alliance that we have with Virgin Australia is now well underway and delivering great results for customers and also for both airlines. Our combined share in the trans-Tasman market has grown significantly year on year.

“As we noted at the time of our original investment, our stake in Virgin Australia also provides us with an interest in the number two airline in Australia and, through this, access to opportunities in the growing Australian domestic market. Air New Zealand has no intention to enter the Australian domestic market in its own right.

“The recent weakness in Virgin Australia’s share price provided us with an opportunity to gain further exposure to Virgin Australia at an attractive price, reducing our average cost of entry from 44cps to approximately 40cps.”