By Leithen Francis in Singapore

Air China, Cathay Pacific Airways, China National Aviation (CNAC), CITIC Pacific and Swire Pacific have confirmed a much-anticipated deal in which Hong Kong-based carrier Dragonair will become, subject to shareholder approval, a wholly-owned subsidiary of Cathay.

As part of the same deal, Cathay will also increase its stake in Air China and Air China will become a substantial shareholder of Cathay Pacific.

In a statement to the Hong Kong stock exchange this morning, the publicly-listed companies in a joint statement say Cathay has offered to pay HK$8.22 billion ($1.06 billion) to buy all the Dragonair shares it does not already own.

It will pay by issuing around 548 million new Cathay shares and paying HK$820 million in cash, according to details in the joint statement.

Cathay already owns 17.8% of Hong Kong-based Dragonair while CITIC Pacific has 28.5%, CNAC 43.3%, Swire Pacific 7.7% and minority shareholders 2.7%.

Swire Pacific, CNAC and CITIC Pacific have agreed to sell all their Dragonair shares to Cathay, the joint statement says, adding that other small minority shareholders will be required to sell too or else Cathay will exercise its legal right to “compulsorily” acquire the shares.

It also says Swire Pacific and CITIC Pacific have agreed to sell to Air China around 40 million and around 359 million shares respectively in Cathay while Cathay has agreed to “subscribe in cash for around 1.18 billion Air China H shares”.

These developments mean that Swire Pacific’s stake in Cathay will fall to 40% from 46.3% and CITIC Pacific’s stake will fall to 17.5% from 25.4%.

Air China will end up with a 10.2% stake in Cathay, CNAC will have 7.3% and public shareholders around 25%. The public currently owns 28.3% of Cathay.

In addition, Cathay will double its stake in Air China to 20%, according to details in the statement.

In terms of management control, the parties have agreed that Cathay’s board will have four non-executive directors and five executive directors nominated by Swire Pacific and “two non-executive directors nominated by each of CITIC Pacific and Air China”.

The parties have also agreed that Swire Pacific and its group will “not exceed 44.9%” of Cathay’s share capital; while CITIC Pacific, Air China and CNAC have agreed that their combined shareholdings will remain within 40%.

Today’s statement says the agreement reached is conditional and requires approval from, for example, shareholders of CNAC and Cathay Pacific.

The announcement says having Dragonair become a wholly-owned subsidiary of Cathay Pacific is advantageous. “The international network of Cathay Pacific and the principally Hong Kong-mainland China network of Dragonair are highly complementary and together will improve Cathay’s network reach.”

“Dragonair [as a stand-alone entity] has proved to be not efficient with the result that it is unable to take full advantage of potential economies of scale.”

It also says Air China and Cathay Pacific are coming closer together.

“Air China and Cathay will continue to work together in exploring ways to improve their service offering, network and connectivity.”

Cathay Pacific is a Oneworld carrier while Air China last month accepted a formal invitation to join rival airline grouping Star Alliance.

Despite this the two are entering into a new “operating agreement” that has the “potential to realise substantial revenue and cost synergies through economies of scale and optimisation of resources.”

“Air China will be exclusively responsible for Cathay’s passenger sales in mainland China while Cathay will be exclusively responsible for Air China’s passenger sales in Hong Kong, Macau and Taiwan.”

This article originally appeared on Air Transport Intelligence, Flight's 24h aviation news and data service.

Source: Flight International