Source: Financial Times Author: 12/19/2007
Subject Concerned: Government Opinion Airlines
If a week is a long time in politics, seven months is an eternity in China's galloping stock markets. Take Shanghai-based China Eastern Airlines, whose shares surged 160 per cent after Singapore Airlines (SIA) announced plans to buy a 24 per cent stake. Could that rousing reception to the deal now spell its death?
On paper, the deal has lost much of its gloss. SIA and Temasek, Singapore's state investment agency, are offering HK$3.80 for newly issued Hong Kong-listed H-shares in CEA. That represented a 36 per cent premium over the average of the previous 30 days before the shares were suspended, but looks like a steal today with the shares at HK$6.15. CEA is talking up the prospects of enhanced profitability with SIA on board. But there is little overlap between the two operations; this is mainly about grafting SIA's superior technology, planning and marketing know-how on to a barely profitable carrier. Finally, while CEA is almost certainly overvalued, so are its peers. It is difficult, in short, for investors to believe that CEA's share price will plummet should the offer fail.
The Singaporeans say they will not raise their bid, which pushed the share price down 13 per cent on December 13. And while the outcome formally depends on next month's shareholder vote, there is inevitably a China state angle. Several Chinese regulators have already given their approval, having withheld it in other instances when targets' prices have escalated. As such it would be unlikely for state-controlled Air China to vote its 12-13 per cent of CEA's H-shares against the acquisition, far less mount a counter-offer. Chinese aviation officials, though, are not averse to U-turns and, unless local markets tank between now and January 8, no one will lose their shirts by withholding support. There are other ways to buy industry know-how.