Shares in China Eastern fell as much as 4 percent on Wednesday, wiping out earlier gains, amid uncertainty over the airline's future after minority shareholders rejected the US$920 million sale of a 24 percent stake to Singapore Airlines.
The vote, at a noisy meeting in Shanghai on Tuesday, opened the door for bigger rival Air China to make a play for the country's third-largest carrier.
China National Aviation, Air China's parent and a stakeholder in China Eastern, has said it will offer at least HK$5 per share for China Eastern within two weeks, trumping the HK$3.80 agreed last year with Singapore Air and its parent, state investment agency Temasek.
"There are too many uncertainties for the future. China Eastern has said it is unwilling to accept an Air China offer no matter what it is," said Kelvin Lau, analyst for Daiwa Institute of Research.
"And we're not sure if Singapore will raise its bid," Lau added. "The worst case scenario is that China Eastern goes it alone. Investors are just not willing to buy the shares right now."
Singapore Airlines said on Wednesday it would not walk away from its offer for China Eastern, but ruled out a bidding war.
"We are still talking to China Eastern and will continue this discussion. SIA is not walking away from this deal," spokesman Stephen Forshaw told reporters at Singapore's Changi Airport. "But we will not get into a bidding war either."
China Eastern's Hong Kong-listed shares closed 0.15 percent lower at HK$6.65, while its Shanghai shares were off 1.75 percent at 20.27 yuan.
In Singapore, shares of Singapore Airlines edged 0.1 percent higher. Analysts said it could be good news for shareholder dividends if the carrier did not revive its bid.
"In the nearer term, the approximately S$860 million saved from the bid could translate into a higher dividend," Goldman Sachs analyst Matthew Chan said, adding long-term investors should accumulate SIA stock on any further weakness.
"(SIA and Temasek are) more likely to suspend efforts to obtain a large stake rather than raise the bid price," Merrill Lynch analyst Paul Dewberry said.
Loss-making China Eastern, squeezed by record fuel prices, said on Tuesday it would try to return to the negotiating table with Singapore Air and Temasek to try and get a better deal. The company's chairman said he was against an Air China bid.
"The market may speculate that there will be another bid. That will impact both China Eastern and Air China stock," said Conita Hung, director at Delta Asia Financial. "But China Eastern is still facing a cloudy business outlook, and rising oil prices will also continue to impact airline stocks."
Air China's Hong kong-listed shares were 1 percent, while its Shanghai-listed shares up 0.7 percent.
"The collapse of the deal means China Eastern will remain a mismanaged company, and restructuring will be delayed," said Yu Jianjun, analyst at Huatai Securities. "This also ends expectations of an industry restructuring that pushed prices up.
"Airline stocks have risen a lot recently partly because of investor expectations for the deal," Yu said. "So the collapse hits other airline stocks as well."