Air China Ltd., the nation's biggest international carrier, offered HK$3.23 billion ($416 million) for complete control of a Hong Kong unit, to almost double its stake in Cathay Pacific Airways Ltd., Asia's second-most profitable airline.

Shareholders in the China National Aviation Co. unit, or CNAC, will get HK$2.80 a share in cash, a 39 percent premium to the stock's three-month average. The deal will give Air China a 17.5 percent stake in Cathay Pacific, the Beijing-based airline said in a statement today.

The CNAC buyout will help complete a deal agreed to earlier this month under which Cathay buys Hong Kong Dragon Airlines Ltd., gaining greater access to China. China Air already owns 68 percent of CNAC, which in turn is the largest shareholder of Dragonair.

``Taking CNAC private make sense because Air China will have direct control of Cathay shares, which will enhance cooperation and simplify the corporate structure,'' Karen Chan, an analyst at Credit Suisse in Hong Kong said. ``CNAC no longer has any purpose as a listed company.''

Cathay said on June 9 it would pay HK$8.22 billion to buy Dragonair to expand its network in China. Dragonair flies to 23 Chinese cities, more than any other Hong Kong-based carrier.

Shifting Shareholdings

As part of the deal, CNAC agreed to sell its stake in Dragonair for HK$4.33 billion in cash and stock, giving the company a 7.3 percent stake in Cathay. Air China will buy 10.2 percent of Cathay for HK$5.39 billion, while the Hong Kong-based carrier will pay HK$4.07 billion to double its Air China stake to 20 percent.

``For Air China, the privatization will bring the operating units of CNAC under our direct control and simplify our shareholding in Cathay Pacific,'' Li Jiaxiang, Air China's chairman said in the statement. ``For CNAC shareholders this privatization reflects an excellent return on their investment.''

On Ling Investments Ltd., which holds 9.8 percent of CNAC, said it will approve the Dragonair sale if Air China offers at least HK$2.80 a share to buy all of CNAC, Air China and CNAC said on June 9.

On Ling is controlled by Novel Enterprises Ltd., according to Hong Kong Stock Exchange records. K.P. Chao, a Hong Kong businessman who founded Dragonair in 1985, owns Novel Enterprises.

CNAC, which listed its shares in Hong Kong in 1997, also has a 51 percent stake in Air Macau Ltd. and in-flight catering businesses.

Financing Purchase

Air China plans to fund the CNAC buyout with bank loans, the company said in today's statement. In addition to the offer for CNAC's shares, Air China offered to pay HK$1.66 in cash for each outstanding option.

The airline is awaiting regulatory approval to sell as many as 2.7 billion yuan-denominated shares in Shanghai to fund the expansion of its fleet. It wants to sell the shares for at least 90 percent of the price of its Hong Kong-traded shares, it said on Feb. 10.

Air China's shares fell 2.5 percent to HK$2.90 in Hong Kong on Wednesday. The stock has gained 17 percent this year, making it the best performer on the Bloomberg Asia Pacific Airlines Index of 10 carriers.

(CRIENGLISH via Bloomberg June 22, 2006)