Bid for China Eastern Airline Stake Rebuffed

HONG KONG — Singapore Airlines was rebuffed Tuesday in an effort to take a stake in China Eastern Airlines in a move that could remake the shape of China’s aviation industry with the possible emergence of one dominant Chinese carrier.

A decision by minority shareholders of China Eastern to reject a tie-up with Singapore Airlines and a Singapore government investor has set the stage for an unusual corporate battle in China.

It has paved the way for a possible counterbid for China Eastern by China National Aviation Holding, the parent of Air China, the country’s biggest carrier. China Eastern, which is based in Shanghai, has vowed to fight any counteroffer to retain its independence.

Both China Eastern and Air China are majority state-owned companies.

At stake, analysts say, are plans to force the consolidation of China’s aviation industry and turn Air China into the single dominant carrier in China, which has the world’s largest aviation market outside the United States.

The outcome could give Air China a powerful grip over China’s two main aviation hubs, Beijing and Shanghai, and the lion’s share of the Chinese market for domestic and international air travel.

It will take several weeks or months for a clear picture to emerge, said Martin Craigs, president of Aerospace Forum Asia, an industry lobby group.

Before Tuesday’s meeting of shareholders, China National Aviation Holding had signaled plans to make a bid for a significant stake in China Eastern should the deal with the Singaporean investors fail.

At a meeting in Shanghai, 78 percent of minority shareholders opposed the sale of a 24 percent stake of China Eastern to Singapore Airlines and the state investment firm, Temasek Holdings. They had offered 7.2 billion Hong Kong dollars, or $920 million, for the stake.

The deal was backed by the China Eastern board and China’s cabinet, the State Council. But since the price of 3.80 Hong Kong dollars a share was negotiated with the Singaporean investors over two years and announced in September, the China Eastern share price has jumped, closing at 6.66 Hong Kong dollars in Hong Kong on Monday before trading was suspended.

Air China’s parent said Sunday that it would offer at least 5 Hong Kong dollars a share if the Singaporean offer were rejected. Cathay Pacific, which has a close alliance with Air China because of a significant crossholding, said Monday that it would consider any requests to join moves to create a strategic partnership between Air China and China Eastern.

China Eastern’s chairman, Li Fenghua, said after the shareholder vote that he would oppose any bid by China National to replace the Singaporean investors and would attempt to keep the deal with Singapore Airlines and Temasek alive.

But China Eastern might not have much choice, analysts said. Singapore Airlines and Temasek are expected to walk away from the deal rather than offer a higher price.

Adrian Lowe, an aviation analyst with CLSA Asia Pacific Markets in Hong Kong, said he doubted the Singaporeans would return to the table with a fresh offer, denying China Eastern shareholders a hoped-for bidding war.

He said that China Eastern, which is carrying a huge debt burden and has suffered a succession of losses, still needs a strategic partner. Technically they would be bankrupt in any other country, but they still have government ownership plus government subsidies, he said.

The vote by shareholders was a victory for Li Jiaxiang, who was appointed head of the Civil Aviation Administration in late December.

Mr. Li, former chairman of Air China, has been an outspoken advocate of creating a supercarrier in China. Mr. Li’s appointment might have been an influential factor in the intervention by China National, which tipped the balance against the Singapore deal.

Mr. Li has argued that the creation of a dominant carrier is essential to ensure that China can compete against major global carriers as they increasingly serve the Chinese market.

Mr. Craigs, the industry lobbyist, said policy considerations might play as big a part as the commercial merits of any partnership in the outcome of the battle over China Eastern.

If China has decided to go down the road of a supercarrier solution, which is Mr. Li;s preference, then China Eastern is not going to have many options or much independence, he said.