Shareholders of China Eastern Airlines on Tuesday rejected a deal to sell a 24 percent stake in the country's third-largest carrier to Singapore Airlines for US$920 million.
Loss-making China Eastern needed two-thirds of both its minority shareholders of locally listed A shares and Hong-Kong-listed H shares voting in Shanghai to approve the stake sale to Singapore Air and its parent Temasek Holdings. Majority shareholder China Eastern Air Holding abstained from the vote.
The move opens the door to bigger local rival Air China, whose parent, China National Aviation, now intends to submit a rival offer within two weeks.
In an 11th-hour attempt to derail Singapore Air and Temasek's acquisition of the stake for HK$3.80 a share, CNAC had said it would pay at least HK$5.00 a share if the Singapore deal failed.
On Monday, Hong Kong's main airline Cathay Pacific dealt a further blow to the deal when it said it would join a proposed alliance between Air China and China Eastern.
Air China's last-ditch attempt raised the stakes in the contest for a carrier that has made losses in three of the past five years, underscoring the lure of an industry growing at more than 16 percent ahead of the 2008 Beijing Olympics.
CNAC, which owns 3.9 percent of China Eastern but which has more than 12 percent of its Hong Kong stock, previously announced it planned to vote against the Singapore deal, arguing the sale was done on the cheap.
Singapore Air and China Eastern have said the deal was fair at six times the airline's end-2006 book value.
Analysts said investors now look more favourably on a tie-up between China Eastern and Air China -- the world's most valuable airline by market capitalization -- especially now that Cathay has broken a three-month silence on its stand in the matter.
Singapore Airlines and Temasek have said they would be loath to have to return to the negotiating table, and almost certainly increase their offer, which was agreed with China Eastern last September.
"Air China seems committed to make a higher bid and to do what it promised. But Singapore would have brought a lot of international management expertise to China Eastern," Daiwa's Kelvin Lau said.
Shares in China Eastern were suspended on Tuesday pending the shareholder vote.