August 12, 2008

China Eastern Fails to Reach a Deal New Partners Sought As Talks With Singapore Airlines End

China Eastern Airlines says it will continue to seek a strategic investor after the expiration of negotiations to sell a stake to Singapore Airlines, as it looks for foreign expertise to shore up its operations.

A recent steep slide in share prices had spurred talk that a deal could be resurrected, even though China Eastern's shareholders have already rejected such a tie-up once.

But analysts say potential acquirers from outside Asia are lurking, and that China Eastern will remain uninterested in a counterbid offered by its domestic rival Air China.

"Although there has been no news, it could even be someone in the Middle East, someone like Emirates, because there is still strong growth in that region and those carriers are less impacted by oil prices," said Kelvin Lau, an analyst at Daiwa Institute of Research.

"But China Eastern is still quite hostile to Air China," Lau said, adding that a deal between the two domestic carriers was highly unlikely.

A person familiar with the situation told Reuters in Shanghai, however, that a deal with Singapore Airlines would be struck.

"The agreement has expired but it is not dead," said the person, who declined to be identified because of the sensitivity of the matter. "China Eastern has no other alternative partner to Singapore Air," the person said, adding that the two sides might renew their negotiations if sentiment improved in the equity markets.

A recent effort by the Chinese government to broker a merger between China Eastern and another domestic carrier, Shanghai Airlines, would not be an obstacle to a deal with Singapore Airlines, the person said.

But Rohan Suppiah, a transport analyst for Kim Eng Securities, said he did not expect Singapore Airlines to make a second bid for China Eastern, following the expiration of their negotiating period on Saturday.

"The original deal was struck between SIA and China Eastern's management, but the opposition came from the shareholders," Suppiah said. "So if shareholders continue to oppose the deal, then there's nothing much else they can do."

Analysts have indicated that Singapore Airlines could be offered stakes in other smaller, regional airlines, like Shanghai Airlines or Shenzhen Airlines.

"SIA will look at any deal that makes commercial sense," Suppiah said. "But it doesn't look like a deal is going to happen anytime soon."

Singapore Airlines and its majority owner, Temasek Holdings, agreed in November 2007 to buy a 24 percent stake in China Eastern at 3.80 Hong Kong dollars a share in a $920 million deal, but it was rejected by China Eastern's minority shareholders, with many complaining that the stake was being sold at too low a price.

In January, the parent company of Air China proposed a cash injection of $1.9 billion that involved a broad tie-up between the two airlines' operations, with Air China offering 5 dollars a share, but China Eastern rejected the offer.

On Sunday, China Eastern said it was still interested in reaching a deal with a new investor.

"The company will persist in the direction of introducing strategic investors and will continue to develop opportunities of business cooperation with strategic investors of world renown," Luo Zhuping, a China Eastern director, said in a statement.

Originally published by Reuters.

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