Is Air NZ's recapitalisation offering 'significant dilution' or 'a fair deal' for shareholders, or both?

Air New Zealand this week announced a plan to raise $2.2 billion as it recovers from the COVID-19 pandemic.

That capital would be used to bolster its balance and pay back a loan from the Government which was used to keep the airline afloat during the pandemic, as the travel industry was decimated.

Part of the recapitalisation package is a $1.2 billion pro rata rights offer, which will allow shareholders to purchase up to two new shares for every one share they own at a price of 53 cents per share - a 61 percent discount on Air NZ's current share price of $1.38 per share.

Felix Fok, a portfolio manager at Milford Asset Management, says this could be good news for some existing shareholders - but not all of them.

"For shareholders who can put in more money, at a very heavily discounted price, this is OK. The story goes on, hopefully with the recovery Air NZ will be doing better a few years down the line," he told AM.

"But for those shareholders who are reticent, who may not be committing more capital, we're likely to see significant dilution.

"What does that mean? It doesn't actually mean you lose a lot of financial value, it just means you potentially lose the upside if Air NZ does better from here."

Air NZ chair Dame Therese Walsh insists it's a fair deal for shareholders who have options with the offering. She said the airline is convinced that now is the right time to "refuel its recovery".

"We feel it's a really fair deal for shareholders. We think it's the right time and fair for everyone involved," she told AM.

"We're really grateful to our shareholders who have stuck with us for the last couple of years. Shareholders are going to have an option: Either to participate, which all shareholders are eligible to do that; but if shareholders don't want to participate or choose not to, they have the ability to sell those rights on the market and potentially get some value. 

"We've taken a considered approach, we've given this a lot of thought. It ties in really nicely with the planning we've done during COVID to get us ready to reemerge."

Air NZ has said it doesn't expect to return a dividend until 2026.

"If all the expectations we've laid out in our investor presentation come to pass, we'll end up in financial profitability land as well as be in a position to potentially pay dividends in 2026," said Dame Therese. 

Fok told AM however shareholders feel about the offering, it's definitely major.

"It's significant in the context of trying to survive the pandemic and potentially emerge stronger. So they're asking shareholders to pony up another $1.2 billion which in the context of a local market is pretty significant - it's about 80 percent of its current market value."

Air NZ was put on a trading halt on the NZ stock exchange on Wednesday ahead of the recapitalisation announcement, which it had promised to make by the end of the month.

The airline twice deferred its equity raising last year as borders remained closed amid COVID-19, causing it to post massive losses.