China Eastern, Singapore Air Halted Amid USD$1 Bln Buy Talk

May 22, 2007

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Shares in China Eastern Airlines and Singapore Airlines were suspended on Tuesday amid reports that Singapore would soon buy up to a quarter of the loss-making, Shanghai-based carrier for nearly USD$1 billion.

A deal would bolster access to booming eastern China for Singapore Air, and beef up China Eastern's balance sheet to help it compete with rivals such as a newly forged alliance between Beijing-based Air China and Hong Kong's Cathay Pacific Airways.

China Eastern's Hong Kong shares closed at HKD$3.73 before the suspension, having gained 60 percent in three weeks amid speculation it was close to unveiling a deal with the Singaporean carrier. Its American Depositary Receipts gained 9.4 percent.

A deal would satisfy the dual objectives of giving SIA a 25 percent stake, while maintaining Chinese state control at over 50 percent, Merrill Lynch said on Monday.

China Eastern (CEA), the smallest of the country's three main carriers, would sell 2.05 billion Hong Kong-traded shares to Singapore Air, while the state would buy 1.3 billion new A shares, the influential Beijing-based Caijing magazine reported earlier this month.

The Shanghai Securities News cited CEA Chairman Li Fenghua as saying on Monday that China Eastern intended to sell up to a quarter of the airline to a foreign strategic investor.

Both companies declined comment. Singapore Airlines said it would make a statement after the market close.

Based on the stock's last close, Singapore Airlines would have to pay more than HKD$7.65 billion (USD$980 million) for the CEA stake.

China Eastern posted a loss of CNY2.78 billion yuan (USD$363.3 million) in 2006. Rivals Air China and China Southern Airlines were both profitable.

Analysts and Chinese state media said a deal was far from certain. Negotiations to secure equity investment from Singapore Air were going smoothly, but a deal would depend on regulatory support, CEA's was quoted as saying.

"While the introduction of a foreign strategic partner is undoubtedly a positive for CEA, we believe it would take time for the carrier to turn around given the depth of its problems," Cazenove analyst Andrew Au wrote on April 26.

"Of more immediate interest to shareholders is whether the strategic partner would be prepared to pay a premium over current valuation for the stake and if so, how much."