Is a cash strapped HNA likely to sell its Virgin Australia share, as SIA quietly watches on?

15 March, 2018

As HNA reportedly enters negotiations with Hilton Grand Vacations Inc., a timeshare business which is part of the parent brand, Hilton Worldwide Holdings Inc, it is likely to make a sizeable profit on its 25% investment made a year ago. A planned sale on the market would release about USD1 billion in assets, about a 100% gain on its purchase price, as the share price has doubled since HNA bought it. But not all of its investments have been so lucrative.

And, following the Chinese government’s crackdown on debt laden investments by some of China’s major companies, HNA has reportedly unloaded billions of dollars worth of real estate investments around the world.

According to Dow Jones newswire, the Hilton sale plans are part of a strategy in which “HNA is looking to crystallize returns on investments that have done well, according to people familiar with the conglomerate's strategy. The company is hoping to generate capital for new acquisitions by disposing older investments that have been successful, one of the people added.”

Aside from its asset sales HNA is making major adjustments to its operating arms. The groups’ airline interests reportedly shed almost all of its high ranking executives across its numerous airlines in the past few weeks, in a blunt effort to reduce costs – but at the same time risking the loss of much needed skills. These cash cows are valuable to the group as they have a constant income stream.

Dow Jones reported HNA has also recently sold its USD1.4 billion holding in Park Hotels and Resorts, “a real-estate investment trust that owns dozens of Hilton hotels”.

HNA, which reportedly invested over USD50 billion over the past couple of years, much of it leveraged debt, and the group is looking at all of its assets as it hurries to liquidate non-core activities.

The investment in Virgin Australia is probably seen in a different light. In the first place a sale would not be wholly straightforward as the Virgin Australia Holdings (VAH) entity that is part owned by HNA is not liquid on the market – there had been expectations of taking the entity private, but these were dispelled at this month’s 1H2018 report - and finding an asset buyer to fit among Virgin Australia’s shareholders would take time. The fact that Virgin has not been profitable would mean attracting buyers could be difficult.

Secondly, the Australian carrier now has a fairly deep relationship with Hong Kong Airlines, including codeshares on the Hong Kong-Sydney route, recently extended to include Australia-New Zealand services. So, pulling out of VAH would potentially have the double disbenefit of undermining Hong Kong Airlines’ viability in the market.

Meanwhile, Singapore Airlines (SIA), a long term wannabe investor in the Australian airline market, might be biding its time. It could probably pick up a good deal with both HNA and Etihad, who between them own some 40% of VAH. You can bet there are some bankers circling with their eyes on the main game.

To read more on HNA’s investment in Virgin Australia and the possibility of the group selling its investment, click here.