China Southern Said in Talks to Sell Stake to American Air (3)

(Bloomberg) -- China Southern Airlines Co., Asia’s biggest carrier by passengers, is in advanced talks to sell a stake to American Airlines Group Inc., according to people familiar with the matter.

The negotiations focus on an investment of about $200 million by Fort Worth, Texas-based American in China Southern’s Hong Kong-listed shares, said the people, asking not to be identified as talks are confidential. The sale likely would take place through a private placement, one of the people said. China Southern has a market value of about $10 billion.

Bringing in the world’s largest carrier as a partner will help the Guangzhou-based airline expand its network through code-sharing as it adds more destinations. The tie-up will help American strengthen its presence in a market that the International Air Transport Association predicts will surpass the U.S. to become the world’s biggest in terms of passenger numbers by 2024. Delta Air Lines Inc. acquired a minority stake in China Eastern Airlines Corp. in 2015.

Under the discussions, American would nominate an observer without voting rights to the Chinese company’s board, the people said. Details of a deal are subject to change and a transaction could still fall through.

A spokesman for American Airlines declined to comment. China Southern representatives couldn’t immediately comment. Trading in the shares of the Chinese carrier was suspended in Hong Kong and Shanghai Thursday, pending an announcement of a possible major strategic cooperation, according to an exchange filing.

Beyond Beijing

China Southern’s stock has gained 35 percent this year in Hong Kong, compared with an 11 percent advance in the benchmark Hang Seng Index.

“The deal would allow China Southern and American Air to expand their presence in each other’s home markets without being constrained by the limit on air rights,” said Su Baoliang, an analyst at Sinolink Securities Co. in Beijing. With the partnership, American Air can reach beyond Beijing and Shanghai to cities like Chengdu and Urumqi, he said.

For a Gadfly piece dissecting the transaction, click here.

A China Southern stake sale would represent the Chinese government’s efforts to diversify ownership of state-controlled enterprises. Authorities have urged firms in industries including power, energy, defense and aviation to take measures this year to broaden ownership.

Shares of China Eastern and flagship Air China Ltd. rallied Thursday on optimism efforts to allow more private investors will intensify, Sinolink’s Su said. China Eastern jumped as much as 6.9 percent in Hong Kong, the biggest intraday gain in three months. Air China rose 5.1 percent, the best intraday performance since June 20.

Plane Orders

China Southern needs to boost its presence in the nation’s main hubs like Beijing and Shanghai as Guangzhou may not get as many international passengers, Su said. The airline and its subsidiaries have ordered more than $15 billion of new aircraft from Boeing Co. and Airbus Group SE since 2015 as more people fly in the world’s most populous nation.

China Southern and Delta are members of the SkyTeam global airline alliance. American is in the competing Oneworld group, which doesn’t have a China-based partner. Such alliances make it easier for passengers to fly around the world by combining schedules through one carrier and allowing travelers to accrue and use frequent-flier miles across airlines. China Eastern also is a SkyTeam member. A Delta spokesman declined to comment.

American closed little changed at $40.35 in New York on Wednesday, leaving the shares down 14 percent this year.

Viable Slots

China Southern is the last of the nation’s top three airlines to bring in a non-mainland Chinese strategic investor. Cathay Pacific Airways Ltd., which is based in Hong Kong, owns about 18 percent of Air China. Besides Delta, Shanghai-based China Eastern also counts online travel-services provider Ctrip.com International Ltd. among its shareholders.

American recently received a six-month extension, until September, to begin flights between Los Angeles and Beijing because it was unable to secure viable slots from the Chinese government.

The airline connects 350 destinations in 50 countries, mostly in North America, the Caribbean, South America and Europe. It has flights from major U.S. cities to Beijing and Shanghai. China Southern -- with a fleet of 684 aircraft as of June 2016, the largest in Asia -- flies to 208 destinations across 40 countries and has been expanding on routes to Australia, New Zealand and Southeast Asia.

(Updates with rally in Air China and China Eastern in ninth paragraph.)

--With assistance from Mary Schlangenstein and Michael Sasso

To contact Bloomberg News staff for this story: Dong Lyu in Beijing at dlyu3@bloomberg.net, Steven Yang in Beijing at kyang74@bloomberg.net, Jonathan Browning in Hong Kong at jbrowning9@bloomberg.net.

To contact the editors responsible for this story: Sam Nagarajan at samnagarajan@bloomberg.net, Jessica Zhou at jzhou75@bloomberg.net, Ben Scent at bscent@bloomberg.net, Tony Robinson, Bruce Rule

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