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Singapore - Qatar Airways agreed to acquire a stake in Cathay Pacific Airways, a deal that would help it gain a foothold in the world’s second-biggest aviation market.
The Middle Eastern carrier will buy 9.6% of Cathay from Hong Kong-based Kingboard Chemical Holdings and related companies for HK$5.16bn ($662m), according to a filing to the city’s stock exchange on Monday.
Chief executive officer Akbar Al Baker, confirming the deal, said the investment "further supports Qatar Airways investment strategy."
When completed, the purchase, the first ever investment by a Middle Eastern airline in an East Asian carrier, would make the Doha-based company the third-largest shareholder in Cathay. It would also provide access to mainland China, a country set to emerge as the world’s biggest aviation market within a decade.
The deal comes a few months after Qatar Airways dropped a plan to invest in American Airlines Group Inc., which rebuffed the attempt.
"Geographically, the Middle Eastern carriers have been constrained from conquering Hong Kong and China," said Mohshin Aziz, an analyst at Maybank Investment Bank Bhd. in Kuala Lumpur. "They have a lot of capacity so they have to look elsewhere. If both airlines can work together, it will definitely be good for Cathay."
Shares of Cathay fell as much as 4.9% on Monday in Hong Kong - in spite of the shares being sold at a small premium - before recouping most of the losses. The deal dimmed the prospects of a merger with Air China, a possibility that has been the topic of much speculation among traders in recent months, said K Ajith, an analyst at UOB Kay Hian in Singapore.
The state-owned carrier, Cathay’s second-biggest shareholder with 29.99%, said it was happy with Qatar Airways’ purchase.
China has been at the center of many deals with global airlines seeking a piece of the pie as international traffic from the country surges. Delta Air Lines bought a minority stake in China Eastern Airlines in 2015, while American Airlines purchase a minority stake in China Southern Airlines this year.
The International Air Transport Association predicts passengers will nearly double to 7.8 billion by 2036, and Asia Pacific will contribute more than half of the new additions.
Cathay is in the midst of the biggest corporate revamp in two decades to help revive earnings after getting squeezed between Middle Eastern carriers such as Emirates Airline and Etihad Airways PJSC at the premium end of travel, and low-cost and mainland Chinese rivals at the other.
It has announced job cuts and was in talks with pilots over compensation as it reported its worst half-year loss in at least two decades in the six months through June.
In a statement Monday, Cathay CEO Rupert Hogg said he looks forward to a "continued constructive relationship" with Qatar Airways.
Cathay Pacific is part of the Oneworld alliance as well. Hong Kong conglomerate Swire Pacific, is the largest shareholder of Cathay with about 45%.
Qatar Airways is also facing troubles back home after the emirate of Qatar came under a blockade starting June by a Saudi-led group of Arab states. Four neighbouring countries barred the carrier from their airspace, forcing it to redeploy a part of its fleet.
A prior attempt to buy an American Air stake didn’t go well for Qatar Airways. The US Company’s chief, Doug Parker said he wasn’t keen on having the Gulf carrier as a shareholder. While the airlines are partners in the Oneworld alliance, Qatar Airways’ move came as a surprise since American had publicly opposed the growth of Middle Eastern airlines in the US, saying they’ve benefited from $50bn in illegal aid.
Qatar Airways has a 20% stake in British Airways parent IAG. It also has 10% of Latam Airlines Group, the biggest South American carrier, and plans to take a 49% stake in minor Italian operator Meridiana.
"Cathay Pacific is one of the strongest airlines in the world, respected throughout the industry and with massive potential future," Qatar Airways said in its statement.
Qatar Airways will buy about 378.2 million shares at HK$13.65 apiece in cash, a 3.4% premium over Friday’s closing price of HK$13.20. The transaction will be completed later Monday, Qatar Airways said.
"I don’t see Cathay being excited about this and I wouldn’t expect major changes even in the medium term," said Will Horton, an analyst at CAPA Centre for Aviation in Hong Kong. "It has the flavour of a passive stake despite the optics appearing significant."
Kingboard Chemical, a diversified group that is into the manufacture of laminates, glass yarn and copper foil, had built up the stake in Cathay Pacific through purchases from the stock market along with its associates.
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