In a statement published in the official China Securities Journal, CNAC said it submitted its proposal to the China Eastern board on January 18. The proposal contains a plan to invest in China Eastern and form a strategic alliance between the two companies. Air China has asked for its shares to be suspended from trading today.
The proposal was widely expected as Air China had pledged to offer HK$5.00 ($0.64) a share for a stake in China Eastern within two weeks of China EasternÆs minority shareholders overwhelmingly rejecting a buy-in proposed by Singapore Airlines and Temasek. Singapore Airlines and Temasek signed an agreement with China Eastern in mid-November last year to buy a 24% stake in the company for a total of $923 million at HK$3.80 a share. Shareholders rejected the proposal on January 8.
China Eastern stock closed at HK$6.75 last week.
Tony Tyler, chief executive of Cathay Pacific Airways, says the carrier will support any proposal by CNAC on acquiring China Eastern as long as it benefits Cathay shareholders. Cathay has a strategic partnership with Air China û the companies hold a 17.5% stake in each other.
According to the Shanghai Securities Bulletin, if CNAC bought a 24% stake at HK$5, plus new shares which China Eastern planned to issue to its parent, it would pay HK$14.9 billion ($1.9 billion) and end up owning 26.41% of the airline. So when the Air China proposal is published on Tuesday there will be keen interest in how the deal is structured and how much Cathay will put in.
Traditionally, CathayÆs management has been very prudent and with a gearing of around 30%, Cathay is in a better financial position than Air China, which has a gearing of about 100%. However, the Hong Kong-based airline is trading at about 1.5 times book value compared with China EasternÆs 3.5 times book value. So at HK$5.0 a share it would be hard for Cathay to justify the deal to its minority shareholders in terms of enhancing shareholder value. It would have to position the deal in terms of strategic and long term benefits which are more difficult to value. Singapore Airlines argued that HK$3.80 was fair value for China Eastern, which is loss-making and desperately needs operational expertise and an injection of capital to ease its 1,000% gearing. The airline, according to analysts, is technically bankrupt.
However, if the deal plays out, Cathay will benefit from and enhance its value through the exclusion of Singapore Airlines from Shanghai, enabling it to build a significant presence in ChinaÆs three main hubs, Beijing, Shanghai and Hong Kong.
The dogfight between Air China and China Eastern is extraordinary in that a contested bid between two state-owned enterprises is unheard of.
Despite the revolt by minority shareholders, China Eastern chairman Li Fenghua, appeared adamant that working with Air China was out of the question. ôWhen it comes to introducing a strategic investor, we will not consider Air China. We still think Singapore Airlines is the best cooperation partner,ö Li said in Shanghai after the vote. "It is not simply the price. If you don't like her, no matter how big the dowry is, it wonÆt work," he added, likening the deal to choosing a wife.
But in this highly political struggle he appears to have misread the direction of the political wind. At the end of 2007 the then chairman of Air China, Li Jiaxing, was promoted to the position of ChinaÆs top aviation administrator, director general of the Civil Aviation Administration of China.
Li has long been pushing for a more aggressive and nationalistic approach and for industry restructuring to turn Air China into a super carrier to better compete with foreign rivals for larger market share. His promotion increased uncertainties over the prospects for the Singapore deal.
The outcome of this highly political and increasingly intense contest will determine the shape of the latest round of aviation consolidation in China. Li appears to have the upper hand over China Eastern chairman Li Fenghua and his apparent desire for a more competitive model with the big three Chinese carriers linking up with international airlines.