Re Joint Venture

RNS Number : 7072H

Air China Ld

25 February 2010

 



Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

AIR CHINA LIMITED (a joint stock limited company incorporated in the People's Republic of China with limited liability) (Stock Code: 753)	CATHAY PACIFIC AIRWAYS LIMITED (Incorporated in Hong Kong with limited liability) (Stock Code: 293)

Joint Announcement

Establishment of Cargo Airline Joint Venture

(1) Air China Limited:

Connected Transaction and Discloseable Transaction

(2) Cathay Pacific Airways Limited:

Connected Transaction

Reference is made to the joint announcement dated 8th June 2006 issued by Air China and Cathay Pacific in respect of the Operating Agreement entered into between Air China and Cathay Pacific on 8th June 2006.  Under the Operating Agreement the parties to it stated their intention to establish a jointly owned cargo airline based in Shanghai.  Accordingly, Air China and Cathay Pacific, among others, entered into the Framework Agreement and the Relevant Agreements on 25th February 2010, which set out the terms under which they have agreed to establish such a jointly owned cargo airline by way of subscription for a 25% equity interest in Air China Cargo by Cathay Pacific China Cargo Holdings and other related arrangements as set out in this announcement.  Upon completion of the Transaction, Cathay Pacific's interests in Air China Cargo will comprise a 25% equity interest in Air China Cargo held by its wholly owned subsidiary Cathay Pacific China Cargo Holdings and a 24% economic interest in Air China Cargo through the returns on the loan provided by Cathay Pacific to AFL. The coming into the effect of, and the completion of the Transaction under, the Framework Agreement and the Relevant Agreements are conditional upon satisfaction of, among others, the following conditions: (a)     Air China and Cathay Pacific having obtained all necessary approvals of relevant regulatory bodies in the PRC and the other relevant competent jurisdictions; (b)     the independent shareholders of Air China in general meeting having passed resolutions approving the Transaction as a connected transaction in accordance with the Listing Rules; and (c)     the independent shareholders of Cathay Pacific in general meeting having passed resolutions approving the Transaction as a connected transaction in accordance with the provisions of the Listing Rules. As Cathay Pacific is a substantial shareholder and therefore a connected person of Air China under the Listing Rules, the Transaction constitutes a connected transaction for Air China under Rule 14A.13 of the Listing Rules.  As the highest of the relevant percentage ratios as defined under Rule 14.07 of the Listing Rules (other than the profits ratio) in respect of the Transaction is more than 2.5%, Air China has to comply with the announcement, reporting and independent shareholders' approval requirements under Rule 14A.17 of the Listing Rules. A circular containing the particulars of the Transaction, a letter from the Air China Independent Board Committee, a letter from the Air China Independent Financial Adviser, together with a notice of the Air China EGM will be dispatched to the shareholders of Air China as soon as practicable.  In addition, as the highest of the relevant percentage ratios as defined under Rule 14.07 of the Listing Rules in respect of the Transaction is also more than 5% but less than 25%, the Transaction constitutes a discloseable transaction for Air China under Rule 14.06 of the Listing Rules and Air China has to comply with the notification and announcement requirements under Rule 14.34 of the Listing Rules. As Air China is a substantial shareholder and therefore a connected person of Cathay Pacific under the Listing Rules, the Transaction constitutes a connected transaction for Cathay Pacific under Rule 14A.13 of the Listing Rules.  As the highest of the relevant percentage ratios as defined under Rule 14.07 of the Listing Rules (other than the profits ratio) in respect of the Transaction is more than 2.5%, Cathay Pacific has to comply with the announcement, reporting and independent shareholders' approval requirements under Rule 14A.17 of the Listing Rules. A circular containing the particulars of the Transaction, a letter from the Cathay Pacific Independent Board Committee, a letter from the Cathay Pacific Independent Financial Adviser, together with a notice of the Cathay Pacific EGM will be dispatched to the shareholders of Cathay Pacific as soon as practicable.

On 25th February 2010, Air China and Cathay Pacific, among others, entered into the Framework Agreement and the Relevant Agreements, which set out the terms under which they have agreed to establish such a jointly owned cargo airline by way of subscription for a 25% equity interest in Air China Cargo by Cathay Pacific China Cargo Holdings and other related arrangements as set out in this announcement.

Background Reference is made to the joint announcement dated 8th June 2006 issued by Air China and Cathay Pacific in respect of the Operating Agreement entered into between Air China and Cathay Pacific on 8th June 2006.  Under the Operating Agreement the parties to it stated their intention to establish a jointly owned cargo airline based in Shanghai.  Air China Cargo will form the platform for the joint venture and its principal operating bases will remain in Beijing and Shanghai.  Air China Cargo is a subsidiary owned by Air China as at the date of this announcement and its registered capital is directly held 75% by Air China and 25% by Fine Star.  Fine Star is wholly owned by CNAC which itself is a subsidiary owned by Air China as at the date of this announcement.  Air China Cargo currently handles all of Air China's cargo capacity and Air China Cargo currently operates 7 Boeing 747 freighters itself and also procures and sells the cargo 'bellyhold space' provided by Air China's extensive passenger flights.

The Framework Agreement and the Relevant Agreements (1) Transaction The Framework Agreement provides for entry into the Relevant Agreements on the even date. Under the Relevant Agreements, the following transactions will take place: (a)     Cathay Pacific China Cargo Holdings will subscribe for a 25% equity interest in Air China Cargo for a consideration of RMB851,621,140 (comprising RMB808,823,530 as contribution to the registered capital and RMB42,797,610 as premium contribution) and Fine Star will make a further capital contribution of RMB238,453,919 (comprising RMB226,470,588 as contribution to the registered capital and RMB11,983,331 as premium contribution) in cash to Air China Cargo.  Following the completion of such equity subscription and capital contribution, the equity interests of Air China, Fine Star and Cathay Pacific China Cargo Holdings in Air China Cargo will be 51%, 24% and 25%, respectively as set out below (with premium contribution credited as capital reserve fund of Air China Cargo):

	Before completion of Transaction			After completion of Transaction
Contribution to the
registered capital of	Amount	Percentage		Amount	Percentage
Air China Cargo	RMB			RMB
Air China	1,650,000,000	75%		1,650,000,000	51%
Fine Star	550,000,000	25%		776,470,588	24%
Cathay Pacific China Cargo Holdings	-	-		808,823,530	25%
Total:	2,200,000,000	100%		3,235,294,118	100%

(b)     AFL will acquire CNAC's entire equity interest in Fine Star. AFL will obtain a loan of approximately RMB817 million from Cathay Pacific, among which (i) approximately RMB627 million will be applied towards AFL's payment obligations under the Fine Star SPA, and (ii) approximately RMB190 million will be used to provide a shareholder loan to Fine Star for it to make the capital contribution towards Air China Cargo as required under the Subscription Agreement.  In return, AFL will pledge its equity interest in Fine Star to Cathay Pacific and Cathy Pacific's returns on the loan will be equal to the dividend returns on the 24% effective shareholding in Air China Cargo; (c)     Air China Cargo will use the capital contributions referred to in (a) above and cash generated from its business operations or commercial bank loans to purchase from Cathay Pacific and Dragonair the Freighter Equipment for a consideration of approximately RMB1,924 million; and (d)     Cathay Pacific will provide a guarantee in favour of Air China in respect of Cathay Pacific China Cargo Holdings' obligations under the Relevant Agreements and undertakes to exercise its contractual rights under the loan agreement with respect to the loan referred to in (b) above and other related agreements to procure Fine Star to perform its obligations under the ACC JVA.  The transactions described above are inter-conditional, i.e. the completion of one transaction shall be conditional upon the completion of all of the other transactions except that if the transaction involving the purchase of Freighter Equipment described under (c) above does not complete simultaneously or immediately following the completion of all of the other transactions described above, the completion of the latter shall not be affected.  Following the completion of the Transaction, Air China Cargo will continue to be a subsidiary of Air China.
(2) Conditions The completion of the Transaction under the Framework Agreement and the Relevant Agreements are conditional upon satisfaction of, among others, the following conditions: (a)     Air China and Cathay Pacific having obtained all necessary approvals of relevant regulatory bodies in the PRC and the other relevant competent jurisdictions; (b)     the independent shareholders of Air China in general meeting having passed resolutions approving the Transaction as a connected transaction in accordance with the Listing Rules; and (c)     the independent shareholders of Cathay Pacific in general meeting having passed resolutions approving the Transaction as a connected transaction in accordance with the provisions of the Listing Rules.
(3) Consideration The consideration for the Transaction was determined through arm's length negotiations between the parties with reference to, as the case may be, the net assets value of Air China Cargo and the value of the Freighter Equipment. As at 31st December 2009, the unaudited net asset value of Air China Cargo was approximately RMB2,054 million.  For the year ended 31st December 2007, the audited net losses before and after taxation and extraordinary items of Air China Cargo were approximately RMB538 million and approximately RMB522 million respectively.  For the year ended 31st December 2008, the audited net profits before and after taxation and extraordinary items of Air China Cargo were approximately RMB10 million and approximately RMB26 million respectively. Under PRC laws, the transfer of state owned assets is subject to a mandatory valuation process. Accordingly, a PRC state approved valuation agency has been appointed and has valued the net assets of Air China Cargo at approximately RMB2,316 million and the Freighter Equipment at approximately RMB1,924 million as of 31st May 2009.  Air China's original purchase cost of the 25% equity interest held by Fine Star in Air China Cargo was approximately RMB857 million.  The unaudited carrying value of Air China's 25% equity interest in Air China Cargo as at 31st December 2009 in the consolidated financial statements of Air China Group was approximately RMB631 million (including share of goodwill of RMB87 million).  Based on the unaudited carrying value of the 25% equity interest in Air China Cargo and considering the dilution of Air China's equity interest in Air China Cargo to 51%, Air China Group will record a gain of approximately RMB65 million (subject to adjustment) in the consolidated financial statements on completion of the Transaction. In respect of the Freighter Equipment to be sold by Cathay Pacific and Dragonair to Air China Cargo, the original purchase cost was approximately RMB2,049 million and their carrying value as at 31st December 2009 was approximately RMB1,592 million.  Cathay Pacific will record a profit of approximately RMB332 million (subject to adjustment) on completion of the Transaction.
(4) Use of proceeds The proceeds received by Air China Group from the Transaction arising from the disposal of interest in Fine Star will be applied towards Air China Group's general working capital expenditure and those from the capital contribution to Air China Cargo will be applied towards part of the price for Air China Cargo's acquisition of the Freighter Equipment from Cathay Pacific and Dragonair under the Aircraft SPA. The proceeds received by Cathay Pacific Group from the Transaction will be applied to replenish the sums paid by Cathay Pacific China Cargo Holdings for the subscription for the 25% equity interest in Air China Cargo, Cathay Pacific's funding of a loan to AFL and the repayment of mortgage loans attached to the Freighter Equipment.
(5) Board composition of Air China Cargo Following completion of the Transaction, the board of directors of Air China Cargo will have seven directors, comprising four directors (including the chairman) appointed by Air China and three directors (including the vice-chairman) appointed by Cathay Pacific China Cargo Holdings.
(6) Support to future business of Air China Cargo To support the future business expansion of Air China Cargo, each of Air China and Cathay Pacific China Cargo Holdings has undertaken that following completion of the Transaction and to the extent it remains a shareholder of Air China Cargo, it shall not, and shall procure that its group members shall not, directly or indirectly establish, acquire or otherwise invest by way of equity into any general cargo airline (i.e. except for express freight airline) registered in the PRC or Hong Kong that is engaged in business substantially the same as the business of Air China Cargo.     (7) Sale of bellyhold space As an ancillary agreement in relation to the Transaction, Air China, Cathay Pacific and Air China Cargo agree that during the term of operation of Air China Cargo as a joint venture under the ACC JVA, Air China Cargo will be exclusively responsible for the sale of bellyhold space of Air China's passenger aircraft and Air China and Air China Cargo will enter into an exclusive sale agreement accordingly with respect to the relevant year at a reasonable price and on the terms agreed by them based on arm's length negotiation.  (8) Further agreements Subject to further negotiation and mutual agreement, Cathay Pacific and Air China Cargo will enter into further agreement(s), including but not limited to a block space agreement, in respect of freighter operations between Hong Kong and Mainland China not later than four years after completion of the Transaction.  Air China and Cathay Pacific will comply with the relevant requirements of the Listing Rules upon entry into any such further agreement(s).
Reasons for, and benefits of, the Transaction The establishment of the cargo airline joint venture based in Shanghai will enable Air China Cargo to capture the air cargo business opportunities of the important and competitive Yangtze River Delta region, and will enable Air China Cargo to deliver better services to satisfy the increasing demand for cargo services in mainland China. The increase of freighter capacity will enable Air China Cargo to provide its customers with a wider range of services of better quality so as to make its competitive strengths stronger and more effective.  The Transaction will also improve Air China Cargo's competitive position vis-à-vis foreign airlines which offer similar cargo services from and to mainland China.  In addition, the investment by Cathay Pacific in Air China Cargo will enable Air China Cargo to provide greater resources and improved service availability to the market.  These improvements will allow Air China Cargo's customers to benefit from greater choice and better access to air cargo services within and to and from mainland China.

Connection between the parties Air China, by virtue of its 29.99% shareholding in Cathay Pacific, is a substantial shareholder and therefore a connected person of Cathay Pacific under the Listing Rules. Cathay Pacific, by virtue of its 18.1% shareholding in Air China, is a substantial shareholder and therefore a connected person of Air China under the Listing Rules.

Compliance with the Listing Rules Air China: As the highest of the relevant percentage ratios as defined under Rule 14.07 of the Listing Rules (other than the profits ratio) in respect of the Transaction is more than 2.5%, Air China has to comply with the announcement, reporting and independent shareholders' approval requirements under Rule 14A.17 of the Listing Rules.  In addition, as the highest of the relevant percentage ratios as defined under Rule 14.07 of the Listing Rules in respect of the Transaction is also more than 5% but less than 25%, the Transaction constitutes a discloseable transaction for Air China under Rule 14.06 of the Listing Rules and Air China has to comply with the notification and announcement requirements under Rule 14.34 of the Listing Rules. The Air China Independent Board Committee has been formed to advise the Air China Independent Shareholders on the Transaction.  China Merchants Securities (HK) Co., Ltd has been appointed as the Air China Independent Financial Adviser to advise the Air China Independent Board Committee and the Air China Independent Shareholders on the Transaction. Air China will convene the Air China EGM to consider and, if thought fit, to approve the Transaction.  Voting will be by poll and Cathay Pacific, being a substantial shareholder of Air China, will abstain from voting. A circular containing particulars of the Transaction, a letter from the Air China Independent Board Committee, a letter from the Air China Independent Financial Adviser and notice of the Air China EGM will be dispatched to the shareholders of Air China as soon as practicable. Continuing connected transactions Currently there are certain continuing transactions between Air China, its subsidiaries on the one hand and Air China Cargo on the other hand, which mainly comprise the following: 1. Air China Cargo is engaged in the sale of bellyhold space of Air China's passenger aircraft.  During its ordinary course of business, Air China Cargo leases a number of properties from Air China, and use some of Air China's simulation training, spare engines and flight equipment and SITA system.  Air China also provides welfare logistics service for retired employees to Air China Cargo; 2. Air China Import and Export Co., Ltd., acting as agent for third parties, leases aircraft and engines to Air China Cargo and also provides Air China Cargo with repair and maintenance services for the aircraft and engines leased to Air  China Cargo; 3. Aircraft Maintenance and Engineering Corporation (Beijing) provides Air China Cargo with repair and maintenance services for its aircraft and engines and other flight equipment and warehouse management for its flight equipment; 4. Air China Cargo provides air cargo services to Shanghai Air China Aviation Service Co., Ltd.; and 5. Golden Phoenix Recruitment Service Ltd. provides agency services for the secondees of Air China Cargo.  Upon completion of the Transaction, the abovementioned transactions will become continuing connected transactions under the Listing Rules, as Air China Cargo will become a connected person of Air China by virtue of being a non-wholly owned subsidiary of Air China in which Cathay Pacific, as a substantial shareholder of Air China, holds more than 10% of the voting rights.  Air China will comply with the relevant reporting, announcement and independent shareholders' approval requirements as set out in the Listing Rules for the continuing connected transactions where applicable. Cathay Pacific: As the highest of the relevant percentage ratios as defined under Rule 14.07 of the Listing Rules (other than the profits ratio) in respect of the Transaction is more than 2.5%, Cathay Pacific has to comply with the announcement, reporting and independent shareholders' approval requirements under Rule 14A.17 of the Listing Rules. The Cathay Pacific Independent Board Committee has been formed to advise the Cathay Pacific Independent Shareholders on the Transaction.  KBC Bank N.V. Hong Kong Branch has been appointed as the Cathay Pacific Independent Financial Adviser to advise the Cathay Pacific Independent Board Committee and the Cathay Pacific Independent Shareholders on the Transaction. Cathay Pacific will convene the Cathay Pacific EGM to consider and, if thought fit, to approve the Transaction.  Voting will be by poll and Air China, being a substantial shareholder of Cathay Pacific, will abstain from voting. A circular containing particulars of the Transaction, a letter from the Cathay Pacific Independent Board Committee, a letter from the Cathay Pacific Independent Financial Adviser and notice of the Cathay Pacific EGM will be dispatched to the shareholders of Cathay Pacific as soon as practicable.

Opinion of the directors The Air China Directors (other than the independent non-executive Air China Directors whose views will be set out in the circular to be dispatched to the Air China shareholders together with the advice of the Air China Independent Financial Adviser) consider that the Transaction is on normal commercial terms, in the ordinary and usual course of business of Air China, fair and reasonable and in the interests of Air China and its shareholders as a whole. The Cathay Pacific Directors (other than the independent non-executive Cathay Pacific Directors whose views will be set out in the circular to be dispatched to the Cathay Pacific shareholders together with the advice of the Cathay Pacific Independent Financial Adviser) consider that the Transaction is on normal commercial terms, in the ordinary and usual course of business of Cathay Pacific, fair and reasonable and in the interests of Cathay Pacific and its shareholders as a whole.
Directors of Air China As at the date of this announcement, the Air China Directors are: Non-Executive Directors:  Kong Dong (Chairman), Wang Yinxiang, Wang Shixiang, Cao Jianxiong, Christopher Pratt, Philip Chen; Executive Directors:  Cai Jianjiang, Fan Cheng; and Independent Non-Executive Directors:  Hu Hung Lick, Henry, Zhang Ke, Jia Kang and Fu Yang.
Directors of Cathay Pacific As at the date of this announcement, the Cathay Pacific Directors are: Executive Directors:  Christopher Pratt (Chairman), James E. Hughes-Hallett, Ian Shiu, John Slosar and Tony Tyler; Non-Executive Directors:  Cai Jianjiang, Philip Chen, Fan Cheng, James W.J. Hughes-Hallett, Kong Dong, Peter Kilgour, Robert Woods and Zhang Lan; and Independent Non-Executive Directors:  Irene Lee, Jack So, Tung Chee Chen and Peter Wong.

Definitions
"ACC Articles"	the articles of association of Air China Cargo entered into by and between Air China, Cathay Pacific China Cargo Holdings, and Fine Star on 25th February 2010 that will take effect as of the completion of the Transaction
"ACC JVA"	the joint venture agreement of Air China Cargo entered into by and between Air China, Cathay Pacific China Cargo Holdings, and Fine Star on 25th February 2010
"AFL"	Advent Fortune Limited, a company incorporated in Cayman Islands for the purpose of acquiring Fine Star and held by a charitable trust
"Air China"	Air China Limited, a company incorporated in the People's Republic of China, whose H shares are listed on the Stock Exchange as its primary listing venue and on the Official List of the UK Listing Authority as its secondary listing venue, and whose A shares are listed on the Shanghai Stock Exchange.  The principal activity of Air China is the operation of scheduled airline services
"Air China Cargo"	Air China Cargo Co., Ltd., a company incorporated with limited liability incorporated in the PRC and a subsidiary of Air China.  The principal activity of Air China Cargo is the operation of cargo airline services
"Air China Directors"	The directors of Air China
"Air China EGM"	An extraordinary general meeting of Air China to be convened to approve the Transaction
"Air China Group"	Air China and its subsidiaries
"Air China Independent Board Committee"	An independent committee of the Air China Directors comprising Hu Hung Lick Henry, Zhang Ke, Jia Kang and Fu Yang all of whom are independent non-executive Air China Directors.
"Air China Independent Financial Adviser"	China Merchants Securities (HK) Co., Ltd
"Air China Independent Shareholders"	Shareholders of Air China apart from Cathay Pacific
"Aircraft SPA"	The aircraft sale and purchase agreement entered into by and between Air China Cargo, Cathay Pacific, Dragonair and Air China Import and Export Co. Ltd. on 25th February 2010
"Cathay Pacific"	Cathay Pacific Airways Limited, a company incorporated in Hong Kong and listed on the Stock Exchange, the principal activity of which is the operation of scheduled airline services
"Cathay Pacific China Cargo Holdings"	Cathay Pacific China Cargo Holdings Limited, a company incorporated in Hong Kong and wholly owned by Cathay Pacific and the principal activity of which is investment holding
"Cathay Pacific Directors"	The directors of Cathay Pacific
"Cathay Pacific EGM"	An extraordinary general meeting of Cathay Pacific to be convened to approve the Transaction
"Cathay Pacific Group"	Cathay Pacific and its subsidiaries
"Cathay Pacific Independent Board Committee"	An independent committee of the Cathay Pacific Directors comprising Irene Lee, Jack So, Tung Chee Chen and Peter Wong, all of whom are independent non-executive Cathay Pacific Directors.
"Cathay Pacific Independent Financial Adviser"	KBC Bank N.V. Hong Kong Branch.
"Cathay Pacific Independent Shareholders"	Shareholders of Cathay Pacific apart from Air China.
"CNAC"	China National Aviation Company Limited, a company incorporated in Hong Kong and a subsidiary of Air China and the principal activity of which is investment holding
"Dragonair"	Hong Kong Dragon Airlines Limited, a company incorporated in Hong Kong and wholly owned by Cathay Pacific and the principal activity of which is the operation of scheduled airline services
"Fine Star"	Fine Star Enterprises Corporation, a company incorporated in the British Virgin Islands and wholly owned by CNAC, which holds 25% equity interest in the registered capital of Air China Cargo as at the date of this announcement
"Fine Star SPA"	the sale and purchase agreement in respect of the sale and purchase of the entire issued share capital and shareholder's loan of Fine Star entered into by and between CNAC and AFL on 25th February 2010
"Framework Agreement"	the framework agreement entered into by and between Air China, Cathay Pacific, Cathay Pacific China Cargo Holdings, Fine Star, Air China Cargo and Dragonair on 25th February 2010
"Freighter Equipment"	the four Boeing 747-400BCF converted freighters powered by PW4056-3 engines and two spare engines to be sold by Cathay Pacific and Dragonair to Air China Cargo under the Transaction.
"Hong Kong"	Hong Kong Special Administrative Region of the People's Republic of China
"Letter of Guarantee"	the letter of guarantee in favour of Air China (for itself and on behalf of Air China Cargo) executed by Cathay Pacific on 25th February 2010
"Listing Rules"	The Rules Governing the Listing of Securities on the Stock Exchange
"Operating Agreement"	the operating agreement dated 8th June 2006 between Air China and Cathay Pacific pursuant to which Air China and Cathay Pacific have agreed to co‑operate in various operational areas
"PRC"	the People's Republic of China, excluding, for the purpose of this announcement only, Hong Kong, Macau and Taiwan
"Relevant Agreements"	the Subscription Agreement, the Fine Star SPA, the Aircraft SPA, the ACC JVA, the ACC Articles, the Letter of Guarantee, the Undertaking Letter and the relevant ancillary agreements
"Stock Exchange"	The Stock Exchange of Hong Kong Limited
"Undertaking Letter"	the letter of undertaking in favour of Air China executed by Cathay Pacific on 25th February 2010
"Subscription Agreement"	the subscription agreement entered into by and between Air China, Air China Cargo, Cathay Pacific China Cargo Holdings and Fine Star on 25th February 2010
"Transaction"	the transactions as described under "the Framework Agreement and the Relevant Agreements - (1) Transaction" of this announcement

By Order of the Board Air China Limited Huang Bin   Tam Shuit Mui Joint Company Secretaries Beijing, 25th February 2010

By Order of the Board Cathay Pacific Airways Limited David Fu Company Secretary Beijing, 25th February 2010

 

END

 

 

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