Shares of Singapore Airlines, the world's biggest airline by market value, rose 1.6% in early trade on Wednesday on reports that it will buy a stake worth $1 billion in China Eastern Airlines.
Singapore Air shares rose 30 Singapore cents to S$18.70 when trading resumed after it said late on Tuesday that it was in advanced discussions on a potential strategic investment but did disclose who it was talking to.
China's influential financial magazine, Caijing, said the state controlled Singapore carrier will take a 25% stake in loss-making China Eastern for HK$7.9 billion (US$1 billion) through a new share sale at HK$3.88 per share.
Singapore Airlines had first confirmed last July that it was in talks with the Shanghai-based airline.
JP Morgan analyst Peter Negline noted that a deal between the two airlines would be complex because of Chinese government involvement, management control and board seats at China Eastern, equity accounting losses and future airline alliance membership of China Eastern.
"A potential deal could have easily run aground of any or all of these issues," said Negline, who rates the stock "neutral" with a Dec. 2007 price target of S$18.50. "In our view, this is a clear message that SIA wants a deal that makes sense. If anything, we see this as a point scored for SIA's CEO, who has clearly indicated that he will not do just any deal."
CIMB analyst Raymond Yap said that while there would be long-term benefits for Singapore Airlines from buying a stake in China Eastern, it would would have to bear the upfront pain of bringing the carrier to its standards of service.
"An investment in China Eastern would give SIA strong access to a fast-growing Chinese aviation market and enhance its network connectivity to the Chinese hinterland," he said. CIMB rates the stock "outperform" with a S$25.60 price target.