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China Eastern sells 24 percent stake
2007-09-02
Struggling after two years of losses, China Eastern agreed Sunday to sell a 24 percent stake to Singapore Airlines and Temasek Holdings, the Singapore government's investment arm, company officials said. The $923 million deal had been long anticipated, with trading in China Eastern's shares suspended since late May. The alliance will bring welcome cash and managerial expertise to China Eastern, a Shanghai-based carrier. "We are determined to ensure the success of our strategic investors," China Eastern Chairman Li Fenghua said at a news conference Sunday. Li said that apart from the financial support, the alliance's key attraction was Singapore Airlines' prestigious brand name. Singapore Airlines will pay $602 million for a 15.7 percent stake in China Eastern, while Temasek will pay $321 million for an 8.3 percent stake, officials said. "We are proud to be playing a growing role in China's aviation market," said Stephen Lee, chairman of Singapore Airlines. "We are confident we can bring more business to each other's airlines." China Eastern is the country's third-biggest carrier. Like other state-owned airlines it has suffered from soaring jet fuel prices and intensifying competition. The company reported net losses in 2005 and 2006. "One thing for sure is that joining with Singapore Airlines will bring a lot of capital to China Eastern," said Ma Yin, an analyst with Haitong Securities. "But this is no guarantee that China Eastern will overcome its debt problems," she said. The deal will enable China Eastern to reduce the ratio of its liabilities to assets to 80.2 percent from 95 percent, the airlines said, improving the Chinese carrier's debt structure and reducing financing costs. China Eastern's Li said he was confident that the airline would manage to return to profitability for full-year 2007. The deal calls for China Eastern to issue 2.985 billion new shares on the Hong Kong Stock Exchange at a price of 3.80 Hong Kong dollars ($0.49). Once the deal is completed, state-owned parent China Eastern Airlines Group will own a 51 percent stake in the company. Publicly traded shares will account for a total of 25 percent of the company's equity. Like other major Chinese companies, airlines are seeking strategic investors to help build their cash bases and upgrade services. China's flagship Air China, based in Beijing, has cross-shareholdings and cooperative arrangements with Hong Kong carrier Cathay Pacific Airways. Speculation over more merger activity stepped up last week after Air China said the government was considering a restructuring of the civil aviation industry to boost efficiency. "Airline companies in China do not perform very well," said Deng Hongmei, an analyst with Essence Securities. But she added, "I'm sure the good service and management from Singapore Airlines will somehow have an impact on Eastern." Its status as a minority shareholder -- China limits foreign ownership in domestic airlines given their strategic importance to less than 50 percent -- could limit Singapore Airlines' say. "It's a tough decision to go into a situation where you have less than 50 percent ownership -- and no decision-making control -- in a carrier like that," said Richard Pinkham, a consultant in Singapore with the Sydney-based Center for Asia Pacific Aviation. The Singapore carrier has seen disappointing results from its previous strategic investments. It held a 25 percent stake in Air New Zealand but lost millions of dollars when the New Zealand carrier came close to collapse in 2001. It has since sold off that stake. Recently, Singapore Airlines Chief Executive Chew Choon Seng said returns on the company's investment in Richard Branson's Virgin Atlantic Airways had been disappointing following the Sept. 11, 2001, terror attacks. "The China Eastern investment is different in that we are going to participate in management. That is the crucial difference," said Singapore Airlines' Lee. With air traffic demand expected to grow 9 percent a year, all of China's airlines are seeing strong increases in demand. China Eastern reported a 12 percent rise in passenger traffic in the January-June period to 26.5 million. Next year's Olympic Games in Beijing are certain to boost demand further. "The biggest thing SIA gets out of this is a growth opportunity," Pinkham said. "The Singaporean travel market has basically reached maturity and is unlikely to post much more than single-digit growth in any future year. China is where the future is." ___ Associated Press Writer Gillian Wong in Singapore contributed to this report.
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