Virgin Australia will buy back a 35% stake in its Velocity loyalty programme for A$700 million ($481 million) from private equity firm Affinity Equity Partners.
The airline states in a stock exchange that it has signed a term sheet for the acquisition, which is expected to occur before the end of 2019.
In July, the airline disclosed that Affinity was exploring options to exit its stake in the programme, and some media reports indicated that it was likely to seek an initial public offering of the company.
Velocity has been a profitable unit for Virgin, reporting earnings before interest and tax of A$122 million for the year to 30 June, as revenue rose 39% to A$411 million.
Virgin has not disclosed how it intends to finance the transaction, but it seems likely that it may have to raise additional debt from bank sources or bond issuances.
At 30 June the airline had cash and cash equivalents of A$1.33 billion, however it has around A$1.1 billion of debt maturing over the 2020 financial year. That includes a $400 million US unsecured bond redemption and the redemption of its Enhanced Equipment Trust Certificates that were issued in 2013.
Nonetheless, S&P Global Ratings says that the carrier has "sufficient balance sheet capability" to complete the transaction, which would have major benefits for it overall.
"In our opinion, full control of Velocity will somewhat benefit the group's earnings profile and discretionary cash flow. We believe this will allow Virgin Australia to more optimally deploy capital across business lines that are currently structurally separated, providing greater opportunities for synergies," the agency states in a research note.
S&P rates Virgin Australia at B+ with a stable outlook.