China Eastern Airlines (CEA) shareholders rejected its planned 24 percent stake sale to Singapore Airlines (SIA) during a vote in Shanghai Tuesday.

 

More than 77 percent of the minority H shareholders and 94 percent of the minority A shareholders voted against the deal as they deemed the offer price of 3.8 Hong Kong dollars (48 U.S. cents) too low.

 

The deal needed the support of two-thirds of both the H and A minority shareholders before going through.

 

The rejection creates the possibility of a strategic alliance between Air China and CEA, as the Beijing-based flagship carrier has been longing to gain a foothold in Shanghai's booming aviation market.

 

The Shanghai-based China Eastern had planned to sell 1.88 billion H shares to SIA and Lentor Investments, a unit of the Singapore government-controlled investment company Temasek Holdings.

 

Li Fenghua, CEA's chairman, said: "Due to some objective factors, and irregular operation of an industry rival, the proposal failed to get approval as hoped. I feel very regretful."

 

"The SIA will not leave us as we have treated each other sincerely while bearing in mind a win-win situation during the past two years," Li told reporters after the vote.

 

"I respect the shareholders and understand what's on their mind. But China Eastern will never give up no matter how big the obstacle it faces."

 

"Till now, SIA is still our best potential partner," he added, "(We) will surely push ahead with the cooperation as long as the laws and regulations allow."

 

SIA said in a statement that it was disappointed with the rejection, but added it would continue to support the building of a relationship with China Eastern.

 

Li Lei, an analyst with China Securities, said the deal will unlikely get shareholders' approval at a later date if Singapore investors refuse to raise the offer price.

 

Despite Li Fenghua's harsh remarks, the rejection still raises the possibility of a potential tie-up between Air China and CEA, as Air China's parent has said it would buy 24 to 30 percent of CEA's shares at 5 H.K. dollars apiece.

 

China National Aviation Corp. (Group), or CNAC, who holds 12.07 percent of CEA's H shares, said on Jan. 6 that it would submit a formal proposal within two weeks of the rejection.

 

The Hong Kong-based CNAC is a wholly-owned subsidiary of Air China's parent, China National Aviation Holdings Company (CNAHC).

 

Li Jiaxiang, former CNAHC general manager and Air China's board chairman, has also been longing for an alliance with China Eastern to gain more access to the Shanghai market, a move aimed at building Air China into a "super carrier" to better vie with foreign rivals for larger market shares.

 

"Air China will gain the most from a tie-up with China Eastern, as it could help it gain a market share in Shanghai, apart from its base Beijing," said Li Lei.

 

China Eastern has a dominant 36 percent share of Shanghai's aviation market, compared with 12 percent of Air China.

 

Li Jiaxiang has recently been promoted to head of the General Administration of Civil Aviation.

 

The rejection, coupled with the promotion, offers the prospect of further restructuring in the nation's civil aviation industry, which is dominated by three state-owned airlines, Air China, China Eastern and China Southern.

 

CNAC said early last week that SIA's offer price of 3.8 H.K. dollars did not reflect the fair value of China Eastern and the deal was unfair to other shareholders and domestic airlines as it includes anti-dilution rights and a non-competition clause.

 

Trading of China Eastern and Singapore Airlines shares was halted Tuesday because of the voting.

 

Air China's A shares plunged 2.18 percent to 28.26 yuan and its H shares slumped 3.04 percent to 10.20 H.K. dollars.

 

(Xinhua News Agency January 9, 2008)