Source: Thomson Financial Author: 12/03/2007
Subject Concerned: Opinion Airlines
China National Aviation Holding Co, parent of mainland flag carrier Air China Ltd, has raised its stake in China Eastern Airlines Corp to 12.07 percent from 11.79, triggering speculation of a bidding war for the carrier between Air China-Cathay Pacific in one team and China Eastern's favored Singapore Airlines-Temasek partnership in another.
The state-owned Chinese holding company, CNAHC, acquired 4.28 million additional China Eastern H shares, according to the stock exchange filing by China Eastern dated November 29.
The stake was bought at an average price of HK$7.585 per share, it said.
CNAHC bought the shares ahead of the scheduled meeting on January 8 of China Eastern's minority shareholders to vote on a proposal to sell a combined 24 percent stake to Singapore Airlines Ltd and Temasek Holdings Pte Ltd.
"Air China's move and (Air China partner) Cathay CEO's recent commentary to 'consider buying CEA' gives more evidence to our belief of a bidding war," said Citigroup analyst Ally Ma in a note to clients. "Most interesting is that this could evolve into the first hostile takeover between two big Chinese state-owned enterprises."
Last month, Singapore Airlines and state-owned investment arm Temasek Holdings signed a final agreement to buy a stake in China Eastern Airlines. Singapore Airlines will own 15.73 percent of the Shanghai-based carrier, and Temasek 8.27 percent, according to their deal.
In September, CNAHC and Hong Kong airline Cathay Pacific Airways said they planned a counteroffer for the China Eastern stake in an apparent bid to thwart Singapore Airlines' move toward the mainland carrier.
But CNAHC and Cathay ditched the plan eventually, announcing that they would not attempt to buy a stake in China Eastern within three months.
Cathay Pacific and Air China already have cross-shareholdings of 17.5 percent under a deal struck last year. As part of that deal, Cathay also took over smaller rival Dragonair, a Hong Kong-based carrier focused on China routes.
Analysts said the attraction for Cathay and CNAHC lies in China Eastern's Shanghai service.
Sixteen of the 32 daily flights between Hong Kong and Shanghai are operated by Cathay and Dragonair.
With China Eastern operating 13 daily flights, a deal could give Cathay a virtual monopoly of the lucrative route.
Analysts said if a bidding war erupts ahead of the January meeting, minority shareholders will be the clear winners.
China Eastern's share price could climb to as high as HK$11.42 in the event Singapore Airlines and Temasek were forced to raise their offer by 58 percent to HK$6 a share for the China Eastern stake, said Ma.
Singapore Airlines and Temasek's combined HK$7.2 billion bid values China Eastern at HK$3.80 dollars a share.
Citigroup kept its "buy" call on China Eastern Airlines and price target of HK$7.50, adding that there could be a significant upside to its valuation on the airline if the bidding price of Singapore Airlines and Temasek were raised.