Looks like the much talked-about HK$7 billion bid by Singapore Airlines and its parent Temasek Holdings for a 24% stake in Shanghai’s loss-making and debt-laden China Eastern Airlines may not happen just yet. Blocking the bid is its arch-rival and shareholder, Air China, as well as its parent China National Aviation Corp. (CNAC), which has now upped the ante by saying it would bid no less than HK$5 per share if shareholders vote against Singapore Airlines’ HK$3.8 offer.
To help you make sense of this highly convoluted affair, let’s take you through what was said by the various stakeholders in the dogfight. First, in a statement on Sunday, the CNAC said:
“The Singapore Airlines proposal merely brings together one China-based airline, one Singapore-based airline and an investment agency and lacks the synergy potential that can be created by the cooperation of two major China-based airlines.”
News of CNAC’s informal, hostile counterbid hit China Eastern fast, sending its share price on the Hong Kong exchange down by 4.5 percent by Monday afternoon (Singapore Air fell 3.2 percent, Air China fell 2.6 percent). China Eastern management then blasted the CNAC, accusing it of “lacking sincerity by not making an offer earlier, and questioned the ability of the opaque state-owned entity to finance the bid”. On CNAC’s accusation that Singapore Airlines offer does not reflect the fair value of the airline, China Eastern had this to say:
“The proposed price of HK$3.80 per share resulted from a long-term negotiation between China Eastern and Singapore Airlines, which is six times of the book value at the end of 2006, much higher than other deals of its kind.”
“We hope investors of China Eastern can eye long-term interests and help build the carrier into a top one.”
“[Air China] is a H-share holder as well as a major rival of China Eastern, so we are concerned that its doubts on the Singapore deal lack independence and objectiveness and can’t represent minority shareholders.”
Together with China Eastern, Singapore Airlines has stuck to its position, saying it will not budge from its offer price:
“The price is fair and mutually agreed between all the parties. It is the maximum justified on the business fundamentals. We remain optimistic that other shareholders will see the merit of this transaction and the benefit that will flow from the long-term strategic partnership between China Eastern and Singapore Airlines.”
Somewhat embarrassed by the incident, China’s Assets Supervision and Administration Commission, which owns all of the nation’s state assets, tried hard to appear neutral and laissez-faire in its statement, saying that it would:
“support the introduction of overseas strategic investors by state-owned enterprises controlled by the central government,” but it would also allow “independent operation of enterprises whose behaviors are guided by market principles.”
A Forbes article notes a shift in official attitude over the weekend, just days after Li Jiaxiang, the chairman of Air China (and a strong supporter of consolidation in the Chinese aviation industry), was appointed to head the Civil Aviation Administration of China. Regulators were previously thought to be keen on the idea of opening up Chinese aviation to foreign investors, and are suspected to have been behind Cathay Pacific‘s (also a CNAC/Air China ally) sudden dropping of its bid for China Eastern last September. In its latest about-face, Cathay Pacific said it would monitor developments closely and “seriously consider” any proposals by China National Aviation or Air China to team up for a bid on China Eastern.
Caught between the world’s largest airline by market value and the world’s most profitable airline, China Eastern shareholders will vote today whether or not to accept Singapore Airline’s offer. If at least a third of shareholders vote against the bid, the deal will be off. And the writing appears to be already on the wall. The CNAC has already quietly built up a 12.07% stake in China Eastern, meaning it will only need to convince just 21.3% shareholders, which won’t be hard to do now that it’s made an informal offer 32% higher than the Singapore Airlines bid.
Photo from superciliousness