Air China vows to launch bid for rival

We will know the result tomorrow but the Air China/SIA/China Eastern/Cathay Pacific nonsense has got itself into a fine mess.

Air China has once again said will bid for domestic rival China Eastern Airlines, in which it holds a significant stake, if CEA's minority shareholders reject a proposed US$917m investment by Singapore Airlines and its parent Temasek at a shareholder meeting tomorrow, Tuesday.

China National Aviation Corp, which owns 12% of CEA's Hong Kong-listed shares, said it could not accept the proposed SIA investment unless the price was raised. Which could be true or it might be that it just wants to scupper the deal. Which is a brave move considering the investment has already been approved by the central government.

SIA on Thursday repeated a statement it made on Wednesday that the price of HK$3.80 per share it intended to pay for 24% China Eastern Airways was fair and the 'maximum justified on the business fundamentals'.

Which really is iambic bull. The price is what someone is willing to pay. Not what someone hopes to get away with.

Citigroup analyst Ally Ma believes that minority investors will reject the SIA proposal and that CNAC is preparing to counterbid for CEA which will be considerably higher.

CNAC on Thursday denied it had been told by the central government not to oppose the deal and said it thought the government would not issue such instructions.

However, an unnamed source - always the best kind, think Deep Throat - reports the State-owned Assets Supervision and Administration Commission (Sasac) had been working behind the scenes to ensure that shareholders did not oppose the SIA investment.

CNAC, which holds about 52% of Air China, and CEA's parent company with nearly 60%, are both wholly owned by Sasac, which holds all government stakes in the country's large non-financial state-owned enterprises.

Air China and Cathay Pacific have a complicated cross-shareholding arrangement under which they own 17.6% in each other.

There is a story that the Chinese government is pressuring other shareholders in China Eastern Airlines to approve an investment by Singapore Airlines which will make Air China, which is state-owned, look a bit silly.

CEA shareholders include UBS, Citadel Investment Group, Deutsche Bank, and a number of Chinese and joint venture mutual funds. Air China holds 12% of the Hong Kong-listed shares. The company is also listed in Shanghai.

Management at China National Aviation Corporation, Air China's parent company, keeps repeating the offer for a combined 24% stake did not reflect fair value. And, given the state of aviation in China, it may well be right.

Tomorrow the proposed deal must be approved by China Eastern's minority shareholders. It could be blocked if holders of more than two-thirds of voting rights represented are against it.

Analysts said the chances of shareholders rejecting the proposal are growing. Why accept a deal when someone is very likely to offer you more?

One way around this would be to abstain from voting. We will know tomorrow, Tuesday.