Air NZ sale of 20 percent Virgin Australia stake to Chinese firm stirs political debate

By Jonathan Barrett and Byron Kaye

SYDNEY (Reuters) - Air New Zealand (AIR.NZ) agreed to sell nearly 20 percent of Virgin Australia Holdings Ltd (VAH.AX) in a deal that adds a second Chinese conglomerate to the carrier's boardroom, stoking debate over the politics of foreign investment in a key sector.

In a deal worth about A$260 million (133.42 million pounds)), Air NZ on Friday said diversified industrial firm Nanshan Group will buy most of its holding in Australia's second-biggest airline after Qantas Airways Ltd (QAN.AX). Previously flagged, the sale cuts Air NZ exposure to a market where intense competition and low fares have hammered profit margins..

Virgin Australia last week agreed to sell a 13 percent stake in itself to China's HNA Aviation for A$159 million (81.59 million pounds), seeking fresh funds and access to China's surging tourism market in Australia's lucrative but fiercely competitive aviation business. Under the deal, HNA Aviation, the largest private airline operator in China, plans to lift its stake to 19.99 percent.

Neither the Nanshan stake nor the HNA deal require approval from Australia's Foreign Investment Review Board (FIRB), which assesses purchases by non-Australian firm of more than 20 percent in a company. However, prospective Chinese ownership of just under 40 percent of one of the country's two biggest airlines quickly generated political debate.

Senator Nick Xenophon, an independent who could hold the balance of power in the Australian Senate after national elections on July 2, called on the FIRB to review the deals. With polls predicting a close result, the major party that wins may need to secure the popular independent's backing to pass legislation after the election.

"Obviously the Foreign Investment Review Board needs to look at that," Xenophon told Reuters in a telephone interview. "My issue has always been about Australian ownership and not targeting the particular foreign countries."

Nanshan's purchase of 19.98 percent of Virgin Australia is comparatively small for a conglomerate with businesses sprawling from metals to real estate, with annual revenue of over 30 billion yuan ($4.6 billion) according to the latest Thomson Reuters data available.

But the deal will develop Nanshan's fledgling aviation operations, which include regional carrier Qingdao Airlines.

Virgin Australia investors welcomed the prospect of greater exposure to China traffic, sending shares up over 5 percent in midday trading to A$0.3, while the broader market was down 1 percent. Air NZ priced the sale to Nanshan at A$0.33 per share, and will retain a 2 percent Virgin Australia holding after completion.

In a statement, Virgin Australia said it expected Nanshan would nominate a representative for its board, joining an HNA representative. "We look forward to meeting with Nanshan Group over the coming weeks to discuss the proposed acquisition," the statement said.

The airline's share register will change dramatically as a result of the Nanshan and HNA transactions, with four companies controlling close to 80 per cent of the share register.

As well as the two Chinese companies, major investors Etihad Airways and Singapore Airlines (SIAL.SI) make up a foursome that will dominate the Virgin Australia boardroom, while Richard Branson's Virgin Group has a further 8.7 percent stake in the airline.

(Reporting by Jonathan Barrett and Byron Kaye in SYDNEY; Additional reporting by Rebecca Howard in WELLINGTON; Editing by G Crosse and Kenneth Maxwell)