SIA doubles its stake in Virgin Australia

SINGAPORE - The partnership between the Singapore Airlines (SIA) family and Virgin Australia is on a roll as they take on the Qantas group in its own backyard.

A day after regulators allowed Virgin Australia to buy a controlling stake in Tiger Airways Australia - an SIA associate - SIA said it is buying another 9.9 per cent of Virgin Australia itself.

This raises its interest in the Brisbane-based airline to 19.9 per cent.

SIA said it will purchase 255.5 million shares from Virgin founder Richard Branson at 48 Australian cents per share, for A$122.6 million (S$155.9 million) in all. The price per share carries a 5.5 per cent premium to Virgin Australia's traded price on Tuesday.

The transaction values the Virgin Group at A$1.2 billion, compared to Qantas's market capitalisation at A$4.2 billion.

Some analysts see the move to gain greater control as a pre-emptive measure against share dilution, in the event that another player wants a bigger bite of the Virgin Australia pie. Etihad Airways, with its 8.6 per cent stake, is one possible candidate; it has made no secret of the fact that it intends to raise its holding in Virgin Australia.

Other analysts saw the move as SIA cementing its existing relationship with Virgin Australia.

CEO of SIA Goh Choon Phong said: "It...demonstrates our support for the ongoing transformation of Virgin Australia, which has created a more competitive aviation market in Australia."

Faced with increasing competition, SIA is trying to grow its position and boost profitability in the high-growth Asia Pacific, including Australasia.

These include taking a bite into the potentially lucrative medium-haul budget market via Scoot (which flies to Sydney and the Gold Coast); boosting the footprint of its regional carrier SilkAir; and upping its involvement in Tiger Airways. It recently subscribed for its pro-rata entitlement of 53.7 million rights shares in Tiger Airways, which if fully converted, raises its stake in Tiger to 46.5 per cent, from its current one-third.

Wednesday's announced purchase will make SIA the joint largest shareholder in Virgin Australia, along with Air New Zealand which owns a matching stake. The Virgin Group owns 13 per cent of the carrier.

Air NZ, in a stock filing on Wednesday, said it has topped up its shareholding to maintain it at 19.9 per cent, debunking market talk that its stake has been diluted by the share issuances to SIA and West-Australian airline, SkyWest.

Both parties are now at the takeover threshold, but SIA has clarified that it has no plans at this point to further increase its holding. Australian listing rules put the control threshold in a takeover bid at 20 per cent, beyond which companies are expected to clarify their intentions.

Although Macquarie Equities analysts noted that there is no talk of a takeover from any of the parties, they said "the transaction moves more of the voting power into the hands of the strategic operating partners."

"The interest from the partners does confirm the strength of Virgin Australia's virtual international network going forward, as it attempts to compete effectively with Qantas's new reach given the Emirates deal," they added.

That move saw Qantas bypass Singapore on its "kangaroo route" to hub in Dubai instead.

Now SIA can take on Qantas with a domestic partner that has built an extensive international network through multiple partnerships.

A bigger stake can also mean a bigger say in how Virgin Australia develops, said UOB Kay Hian analyst Ajith K. "By boosting its shareholding, SIA would have more representation and can influence policy and strategy that could be beneficial to itself and Virgin Australia. The two can cooperate more closely."

SIA's purchase is subject to approval from Australia's Foreign Investment Review Board.

It first bought its 10 per cent stake in Virgin Australia in late 2012. The two carriers entered into a long-term partnership in 2011, covering codesharing, reciprocal frequent-flyer programme benefits and coordinated schedules.

Virgin Australia shares rose 1.1 per cent to close at 46 Australian cents, while SIA ended the day at $10.78, up 1.2 per cent.

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