Air China plans to buy China Eastern

A Reuters report says that Air China parent China National Aviation Corporation said on Thursday it will make a counter offer for rival China Eastern if that carrier’s shareholders reject a plan to sell a stake to Singapore Airlines.

CNAC, which holds a 3.9 percent stake in China Eastern, said it will vote against Singapore Airlines’ proposal to buy a 24 percent stake in China’s No. 3 airline for USD$920 million.

CNAC, whose Air China is the country’s biggest airline, has said Singapore Airline’s offer of HKD$3.80 per China Eastern share is too low and has demanded sweetened terms.

“We still expect that the subscription resolutions will be improved… and we will not accept the subscription resolutions if they are not improved as expected,” CNAC said in a statement late on Thursday.

China Eastern shareholders are due to vote on the Singapore Airlines deal at a meeting in Hong Kong on January 8. CNAC owns 12 percent of China Eastern’s Hong Kong-listed shares.

Shares in China Eastern fell 11 percent to HKD$7.16 on Thursday as the planned sale of the stake to Singapore Airlines and Singapore state investment agency Temasek came under fire from CNAC.

China Eastern said in a statement on Thursday the price agreed with Singapore Airlines was fair, at about six times end-2006 book value. It said CNAC’s claim that Singapore Airlines was buying its stake cheaply was not objective.

“China National Aviation is the parent of our main rival,” China Eastern said. “They cannot objectively and independently express the interest of minority shareholders.”

Hong Kong’s Ming Pao newspaper quoted unidentified sources as saying CNAC planned a HKD$5 a share counter offer for China Eastern, which Citigroup analyst Ally Ma said was the minimum shareholders would accept.

The Singapore Airlines deal would give the world’s most profitable carrier access to China’s booming travel industry. Shanghai-based China Eastern, which has posted losses in three of the last five years, would get much-needed cash and industry know-how.

China’s aviation industry is expected to be boosted by this summer’s Olympic Games in Beijing and the 2010 World Expo in Shanghai, although record oil prices could crimp profits.

Domestic airlines flew 139 million passengers in January-September last year, up 16.2 percent, according to the General Administration of Civil Aviation.

Beijing is opening its potentially lucrative skies, encouraging airlines to seek international expertise, and pushing for sector consolidation — a campaign that has seen Air China tie up with Hong Kong’s Cathay Pacific Airways.

The Financial Times reported that Beijing was pressuring other shareholders in state-controlled China Eastern to approve the deal with Singapore Airlines.

CNAC said Beijing was unlikely to put pressure on China Eastern shareholders, and said it had never been told by the state-owned Assets Supervision and Administration Commission, which controls all large state-owned firms, what stance to take on the Singapore Airlines deal.

Since September, China Eastern shares have jumped to a high of HKD$10.50, triggering complaints from CNAC that Singapore Airlines was buying the stake on the cheap.

Shares in China Eastern dropped 11 percent to HKD$7.16 on Thursday. Air China fell 7.8 percent to HKD$10.64.

“Investors are cashing out in case the deal hits a snag. But even if Air China’s parent offers HKD$5 a share, there’s still a huge gap with the current price,” said Ben Kwong, chief operating officer at broker KGI Asia in Hong Kong.

Air China shares were marked down on fears it may have to help bankroll a CNAC counter bid, brokers said.

“Money is not a problem.”  “They will use all financing channels, and China Eastern is worth it,” Hong Kong newspaper Apple Daily quoted an unidentified source as saying.

In Singapore, Singapore Airlines closed down 0.6 percent after earlier dropping to its lowest since mid-August.

“The China Eastern deal looks like it’s in difficulties, so that could be a reason why people are trimming SIA off their portfolios,” a dealer based in Singapore said.

Air China also said on Thursday its chairman Li Jiaxiang was standing down to become head of China’s civil aviation regulator.

A Report by The Mole from Reuters