Virgin Australia will invest Australian dollars (A$) 8 million ($8.3 million) in regional carrier Skywest Airlines, effectively taking a 10% stake in the carrier to capitalise on opportunities in regional Australia.
The deal involves an A$8 million convertible facility which Virgin can convert into ordinary Skywest shares at a price of A$0.45 per share. This matures on 15 April 2015 and pays an interest of 7.5% annually.
Skywest has also agreed to grant Virgin a first tranche of 4 million warrants at A$0.05 each, which Virgin can convert at a price of A$0.45 per warrant, along with rights to participate in future share issues to avoid dilution.
Skywest also intends to grant Virgin a further 2.41 million warrants, subject to Skywest shareholders' approval and provided there is no objection under Australia's foreign investment policy.
If the facility and all warrants are converted by Virgin, the company would hold an equity stake of approximately 10% in Skywest.
"This investment highlights our belief in the growth potential of the Australian regional market and strengthens our partnership with Skywest," says Virgin Australia chief financial officer Sankar Narayan.
He adds that the carrier's regional operations has grown significantly since it launched new services to Emerald, Gladstone and Port Macquarie with Skywest in October 2011. It will increase its aircraft fleet used to operate these services from four to 12 by the end of the financial year 2013.
"We have also recently received draft final approval from the ACCC [Australian Competition and Consumer Commission] to provide an integrated offering with Skywest to corporate customers so that we can cater to increased demand from the resource industry. The investment announced will further cement this relationship," adds Narayan.
Virgin Australia operates mainly inter-state domestic and international services while Skywest operates intra-state and charter services in Western Australia.