SINGAPORE: Cathay Pacific's budget-airline deal may come with an HNA surcharge. Buying Hong Kong Express for $630 million is a sensibly defensive move.
One shareholder – possibly the target's own chairman – has threatened to fight the sale, however. That could raise the price for the buyer, and serves as a warning to others shopping at the ailing Chinese conglomerate.
After swinging from two years of losses to a profit in 2018, Cathay Pacific Airways is approaching the end of a three-year overhaul.
Boss Rupert Hogg is now ready to join those he struggled to beat, snapping up the city's only low-cost carrier.
Having acquired Dragonair over a decade ago, Cathay will now control half of Hong Kong's capacity and have ample room to push into the discount segment already tapped by the likes of Singapore Airlines and Qantas.
Only 12 percent of the city's traffic is budget-oriented, according to consultancy CAPA, below the Asian average.
Unprofitable HK Express has not come cheap. The price tag amounts to more than four times book value, according to Daiwa analysts, while rivals like Air Asia trade at closer to one times. That misses the potential, however.
In a hub where capacity cannot keep up with passenger growth, $7 billion Cathay wants more slots and to capitalise on Hong Kong's planned third runway. It also wants to prevent a competitor from muscling in.
Buying from HNA, a sprawling group which owns Hong Kong Airlines and others, comes with its own quirks.
Indeed, the deal's fine print rattled investors. Cathay said an unnamed shareholder of an intermediate holding company is contesting the transaction.
HK Express Chairman Zhong Guosong is the investor in question, according to Chinese daily Caixin. Zhong is also an indirect owner of HNA and involved in a separate debt dispute with it.
Such complexities have arisen before. In 2017, for example, one HNA dealmaker who also served as a board member at some of its companies said he was holding a stake in the parent as a favour.
Ultimately, Zhong may prove more of an irritant than an obstruction. For other suitors of HNA assets, though, it's worth watching out for potential hidden fees before getting on board.
