Turmoil continues for China Eastern deal

The Singapore Airlines bid to buy a 24 percent stake in China Eastern Airlines appeared in trouble Wednesday after a major shareholder criticized the deal as unfair.

China National Aviation Holding, the parent company of flag carrier Air China, said in a statement Tuesday that the 7.2 billion Hong Kong dollar, or $923.8 million, offer by Singapore Airlines and its parent, the government investment arm Temasek Holdings, did not "reflect the fair value of China Eastern." The offer equals 3.80 dollars per share.

Hong Kong-listed China Eastern, China's third-biggest carrier, traded at 7.95 dollars a share in Hong Kong Wednesday, an increase of 3 percent on Monday's close and more than double the Singapore bid.

Singapore Airlines, however, said the offer was "fair and mutually agreed by all parties."

"It is the maximum justified on the business fundamentals," a spokesman, Stephen Forshaw, said.

The statement by China National Aviation Holding, which holds a 12.07 percent stake in China Eastern, was the strongest indication yet that it would vote against the deal at a shareholders' meeting Jan. 8.

Analysts have speculated that China National Aviation may not support the tie-up because it could pose a major competitive threat to Air China's business.

They have said that Air China, together with Cathay Pacific Airways, could make a higher bid for the stake. Cathay and Air China had teamed up in September last year to bid for the stake in China Eastern, but then pulled out.

Air China said at the time it would not bid for China Eastern shares for three months. It did not say whether it would revisit the proposal after that time, prompting analysts to speculate that it could make another bid early in 2008.

Morgan Stanley, however, noted that any offer by China National Aviation Holding would still need to first gain approval from China's regulator, which had already approved the Singapore Airlines joint bid.

CLSA said in a research note Dec. 24: "While we are uncertain whether Air China will be able to take a substantial stake in China Eastern Airlines, more consolidation would be positive for the Chinese airline sector as a whole."

Representatives at Air China, China National Aviation and Cathay Pacific were not available to comment Wednesday.

China National Aviation said in its Tuesday statement it objected to antidilution rights and a noncompetition clause in the deal that were unfair to other China Eastern shareholders and to the local airline industry.

It urged China Eastern to re-negotiate the terms of the stake sale to reach an agreement acceptable to shareholders.

China National Aviation said it reserves the right to make further proposals for China Eastern "which are more in the interests of all shareholders."

"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," according to Forshaw at Singapore Airlines.