SYDNEY – Air China’s parent, China National Aviation Corp (Group) Ltd (CNAC), has a passion for deal-making. In the past few years, it has been intimately involved in some of the biggest structural reforms of the Chinese aviation industry, including leading the consolidation of airline ownership interests in the Mainland (China) and Hong Kong.
For decades, CNAC had been a key stakeholder in Hong Kong aviation, so its 2006 deal with Cathay Pacific and Dragonair was a natural development. A pitch for control of Shenzhen Airlines, based in the fourth largest Mainland air market of Shenzhen, followed, but was unsuccessful (although Air China retains a 25 percent stake in that carrier too).
Developing its presence in the all-important Shanghai market was an inevitable next step. So, when Singapore Airlines put the sale of China Eastern Airlines in motion, CNAC and Air China were always going to be interested.
A spirited campaign to disrupt the Singapore bid has ensued and, on the balance, looks likely to succeed. Rumors of a counter-offer surfaced in Sept. 2007, helping propel China Eastern’s share price to such levels that Singapore’s buy-in price looks extremely low. CNAC then publicly refused to support the deal and later called for a higher offer. Most recently, it has announced it would make a counterbid, with reports the price could be 32 percent higher than the current offer (but still well below today’s market price).
The outcome of this unprecedented campaign (unprecedented in that the Singapore offer already had the blessing of Beijing) is that minority interests are now likely to block the deal in a vote on January, 8, 2008. Singapore Airlines has already said it does not want to be drawn into a bidding war for a loss-making Chinese airline. But access to China’s key Shanghai hub is likely to tempt a higher offer from SIA.
Then there is the political/policy issue to resolve. The remarkable timing of Mr. Li Jiaxiang’s appointment to director general of the Civil Aviation Administration of China, until last week the Air China chairman, outspokenly opposed to the SIA deal – must at least tilt the balance in favor of CNAC/Air China.
Air China and CNAC have had a successful culture of consolidation and the juggernaut could roll on. However, SIA and Temasek have invested heavily – financially and politically – in this bid. The odds are that this saga will not end next week.