China's No. 1 and No. 3 airlines nosedived on Thursday as doubts clouded China Eastern's increasingly troubled campaign to sell a US$920 million stake in itself to Singapore Airlines and Temasek Holdings.
Speculation swirled this week that Air China, the world's biggest carrier by market value, or its parent would launch a rival bid, precipitating a bidding war over an airline that has wallowed in the red in three of the last five years.
China Eastern shares closed the morning down 7.5 percent at HK$7.45 after having gained 4.4 percent on Wednesday.
Air China plunged nearly 9 percent, partly on fears that the company could be roped in to help bankroll a counter bid from its parent, brokers said.
Hong Kong's benchmark index fell 1.8 percent on Thursday morning, while Singapore Air slid 1.7 percent, in line with the market.
Hong Kong's Ming Pao on Thursday quoted unidentified sources as saying that Air China's parent planned a HK$5-per-share counter offer for China Eastern -- which Citigroup's Ally Ma said was the minimum that shareholders would accept.
"Investors are cashing out, just in case the deal hits a snag. But even if Air China's parent offers HK$5 a share, there's still a huge gap with the current price," said Ben Kwong, chief operating officer for brokerage KGI Asia.
To be sure, China Eastern's stock has more than doubled since
May, when the carrier first unveiled a deal to sell a 24 percent stake to Singapore Airlines and Singaporean government investment vehicle Temasek.
China Eastern argued via a statement on Thursday that their standing HK$3.80 per-share offer was fair, at about six times its end-2006 book value.
But investors -- spooked by the mounting uncertainty -- nevertheless chose to sit on the sidelines.
"The China Eastern deal looks like it's in difficulties, so that could be a reason why people are trimming SIA off their portfolios," a dealer based in Singapore said.
Stockholders, including China National Aviation with over 12 percent of China Eastern's Hong Kong shares, are due to vote on the deal on Jan. 8.
Beijing is prising open its long jealously guarded skies, encouraging airlines to seek out international expertise, and pushing for sector consolidation. That campaign saw Air China tie up with Hong Kong's Cathay Pacific last year.
Now, in the latest round of a public, escalating verbal sparring match, China Eastern on Thursday rejected Air China's parent's claim that Singapore Air was buying its stake on the cheap, saying the firm was biased.
"China National Aviation is the parent of our main rival," China Eastern said on Thursday. "They cannot objectively and independently express the interest of minority shareholders."
CNAC's comments had come on Wednesday in its first public admission of
opposition. They raised the possibility that the Singaporean buyers would need to ratchet up their offer.
Still, other analysts speculated that Air China or its parent might step in and fill Singapore Air's shoes should the acquisition fall apart.
A CNAC spokesman declined to comment on Thursday's newspaper reports, but told Reuters the airline would indeed consider a proposal should the Singapore deal get rejected.
Bolstering Air China's case, ex-chairman Li Jiaxiang has been appointed head of the country's civil aviation regulator.
"Money is not a problem. They will use all financing channels, and China Eastern is worth it," an unidentified source was quoted by Hong Kong newspaper Apple Daily as saying.