China Eastern rejects Singapore Air deal

• Air China makes purely commercial effort to lobby China Eastern's public shareholders, which would not have taken place a few years ago by state-owned Chinese companies.
• The battle reflects the start of a restructuring of China's airline industry.

BEIJING — Shareholders in China's third-largest airline rejected a bid by Singapore Airlines to buy a minority stake Tuesday after a rival Chinese carrier offered more money in an unusual public takeover battle involving two state-owned companies.

China Eastern Airlines supported the Singapore bid, which would have brought the struggling carrier cash and foreign expertise. But nearly 78 percent of shareholders who voted at a meeting in China Eastern's home city of Shanghai rejected the deal, the airline said.

The rejection was a blow to Singapore Airlines' efforts to gain a foothold in China's booming air travel market, which is expected to become the world's largest in the next two decades.

It came after Air China, another state-owned carrier, made a last-minute public offer to top the Singapore price.

China Eastern chairman Li Fenghua, reading a written statement before reporters, expressed "great regret" at the outcome. He said Singapore was still his company's ideal partner and that it would not consider Air China as a strategic partner. Analysts have said that could lead to China Eastern being absorbed by its Beijing-based rival.

Singapore Airlines said it would make a statement through its country's stock exchange later Tuesday.

The Singapore offer prompted both sides to launch Western-style public lobbying of their minority public shareholders, a radical step for the secretive world of China's major state companies. The battle could reflect the start of a restructuring of China's airline industry.

The market is dominated by three state-owned carriers _ Air China, China Eastern and the biggest, China Southern Airlines _ all of which have sold minority stakes to the public on the Hong Kong and Shanghai stock markets. Regulators have been talking about consolidating them, possibly going so far as to create a single, giant Chinese airline, in order to compete better with foreign carriers.

Still, the Chinese cabinet approved the Singapore deal and the state agency that ultimately owns both China Eastern and Air China said it would let shareholders decide the deal on economic grounds.

Because of that, financial analysts said the Air China bid appeared to be a purely commercial effort by a competitor to increase its control over the China market.

"The SIA deal had the backing of the government, so this really is a domestic action ... by a rival wanting to take over another," said Pete Harbison, chairman of the Center for Asia Pacific Aviation, a consulting group.

Singapore Airlines and its parent, the government investment agency Temasek Holdings Ltd., offered 7.2 billion Hong Kong dollars (US$923.8 million; euro627.5 million), or about HK$3.80 a share for a 24 percent stake in China Eastern.

Air China issued a public statement over the weekend offering investors at least HK$5 per share if they rejected the Singapore tie-up. Air China has a partnership with Hong Kong-based Cathay Pacific, one of the region's most accomplished carriers, which could supply China Eastern with international expertise.

Cathay said Monday it would consider joining a strategic alliance with Air China and China Eastern.

"In a period of four months, CNAC has never directly communicated with the Board and the management of CEA regarding cooperation," it said in a statement Monday.

Trading in China Eastern shares in Hong Kong and Shanghai was suspended Tuesday pending the outcome of the vote. China Eastern shares fell 3.8 percent in Hong Kong on Monday before the suspension.

Trading in Singapore Airline shares was also suspended Tuesday.

The need to win over public shareholders prompted Air China's unusual strategy, Harbison said. He said such a public battle would not have taken place a few years ago.

"It may have happened behind closed doors, but we wouldn't have known about it," he said. "I think Air China realized that if it wanted to convince shareholders then would need to do so publicly."

Associated Press

Timeline

May 10, 2007 -- Singapore Airlines says it has had 10 months of talks with China Eastern but has not reached a decision on whether to buy a stake in the airline.

May 23, 2007 -- An influential Chinese financial magazine reports that Singapore Airlines will take a 25 percent stake in China Eastern for $1 billion.

May 29, 2007 -- Sources say the planned bid by Singapore Airlines is raising concerns within the Chinese government.

September 2, 2007 -- Singapore Airlines and its parent Temasek say they will pay US$920 million for a 24 percent stake in China Eastern.

September 3, 2007 -- China Eastern shares jump 76 percent to a record as trading resumes after being suspended since May.

September 24, 2007 -- Cathay Pacific says it wanted to enlist the parent of its partner Air China to buy a slice of China Eastern but that the deal would no longer go ahead. It does not explain why not.

November 9, 2007 -- China Eastern says Singapore Airlines and Temasek Holdings sign a definitive deal to buy a 24 percent stake in the airline for US$920 million.

December 13, 2007 -- China Eastern says the bid from Singapore Airlines and Temasek Holdings is a "final deal", sending its shares skidding, as investors abandon hopes of a bidding war. China Eastern said it expects to return to profit for the whole of 2007.

January 1, 2008 -- China National Aviation calls the Singapore Airlines bid unfair and too cheaply priced, suggesting the firm will vote against the impending acquisition.

China Eastern and Singapore Airlines insist deal is fair.

January 6, 2008 - China National Aviation vows to pay at least HK$5 per share for between 24 percent to 30 percent of China Eastern, at least 32 percent more than rival suitor Singapore Airlines' agreed HK$3.80 per share.

January 7, 2008 -- Cathay Pacific Airways says it will consider joining China National Aviation Corp (Group) Ltd, the parent of its partner Air China, in a higher bid to counter arch-foe Airline's offer for China Eastern shares.

January 8, 2008 -- Minority shareholders vote against China Eastern's proposal to sell a 24 percent stake to Singapore Airlines and Temasek.