Singapore Airlines and its parent Temasek will pay US$918 million for a combined 24% stake in China Eastern Airlines, in the first purchase by foreign firms of a major, strategic stake in a top Chinese airline.
The deal, approved by the Chinese government last month after at least a year of talks, may herald more tie-ups in China's booming aviation sector as Beijing seeks to make the industry
Singapore Airlines and Temasek, a Singapore government-owned investment vehicle, will buy new Hong Kong-listed H-shares in China Eastern at HK$3.80 each, the airlines announced on Sunday.
That represents a 1.9% premium to the last close of China Eastern's stock in Hong Kong -- but a massive 62% discount to its A shares in Shanghai's bullish market.
The deal will give Singapore Airlines and Temasek stakes of 15.7% and 8.3%, respectively, in the weakest of China's top three carriers.
China Eastern will also raise $536 million by issuing H shares at the same price to its own state parent. The combined issues, accounting for 38 percent of its expanded share capital, will leave China Eastern 51% owned by its Chinese parent.
The long-awaited deal is expected to give a big boost to China Eastern, which will benefit from Singapore Airlines' financial backing, managerial expertise and international network.
The Shanghai-based airline has only just struggled back into the black, posting a tiny net profit of 58.21 million yuan ($7.7 million) in the first half of this year against a 1.34 billion yuan loss a year earlier.
Singapore Airlines, the world's second biggest airline by market capitalisation, will be better able to compete with main Asian rival Cathay Pacific Airways, based in China's territory of Hong Kong. Cathay owns over 17% of flag carrier Air China.
"This is not a one-off financial investment -- it's a strategic move for Singapore Airlines," the Singaporean flag carrier's chairman Stephen Lee told a Shanghai news conference.
Singapore Airlines would obtain two seats and Temasek one seat on China Eastern's expanded 14-seat board, while the Singaporean carrier would become involved in China Eastern's
long-haul routes, marketing and daily operations.
Although Singapore's board representation will be small, Chinese banks have been able to boost their efficiency and bring bad loans under control over the past few years partly through
similar strategic investments by foreigners.
There is a three-year lock-up period during which the new shares cannot be sold, though Temasek would be allowed to sell its stake in China Eastern to Singapore Airlines during that
period, the Chinese airline said.
China Eastern said that as a result of the share issues, its debt-to-asset ratio would drop to 80% from 95% at the end of last year.
"The market has been waiting for this to go through for a long time, but if both sides can take advantage of the synergies available, it will be a win-win deal," said Li Lei, analyst at
China Securities in Shanghai.
Air travel is booming in China, fueled by double-digit economic growth and growing international tourist and business travel. In the first half of this year, Chinese airlines carried nearly 17% more passengers and over 15% more cargo compared to a year earlier.
China Eastern's shares have been suspended in Hong Kong and Shanghai since May 22 pending announcement of the deal.
Approval of the deal caused shares in Chinese airlines to rocket last week amid speculation about more tie-ups. The Shanghai-listed shares of Air China, the world's biggest airline by capitalisation, soared 24%.
Air China President Cai Jianjiang told reporters last week that he would not exclude the possibility of a restructuring of the industry that might include his company and China Southern, also one of the "big three."
Analysts said a major equity tie-up between China's top carriers was unlikely any time soon because of the complexity of a deal and the companies' fierce independence.
But they said smaller players such as Shanghai Airlines, which saw its shares jump 19% last week, would face more pressure to secure new investors.
"The prospects for Shanghai Air are now murky," said Li. "It will have to seek outside help to avoid being swallowed up by bigger local rivals.