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China Eastern offers 9b CNY for Shanghai Air
Published on: 2009-07-13
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July 13 (Bloomberg) -- China Eastern Airlines Corp. offered about 9 billion yuan ($1.3 billion) for Shanghai Airlines Co. to become the nation’s second-biggest carrier and gain control of about half of air travel in the nation’s financial capital.
 
The carrier will exchange 1.3 new Shanghai-listed shares for each share of the smaller airline, it said in a statement yesterday. That’s a 17 percent premium based on the two state- controlled companies’ closing prices on June 5. China Eastern also plans to raise about $1 billion selling new shares.
 
Both stocks rose by the 5 percent daily limit on optimism the combination would ease competition in Shanghai and help China Eastern raise fares. The government backed a deal after bailing out the two airlines, which had combined losses of 16.5 billion yuan last year.
 
“It’s a vital step for China Eastern,” said Ma Ying, an analyst at Haitong Securities Co. in Shanghai. “The merger is like reviving a dying person.”
 
China Eastern rose to 5.60 yuan and Shanghai Air climbed to 6.22 yuan at 10:30 a.m. in Shanghai trading. In Hong Kong, China Eastern, now the country’s third-largest airline, traded up 5.2 percent at HK$1.84 after gaining as much as 13 percent.
 
China Eastern closed in Shanghai on June 5 at 5.33 yuan. Shanghai Air closed at 5.92 yuan the same day. Shanghai Air has 1.3 billion shares according to the statement.
 
Approval
 
Shanghai Air’s board backs the deal, the carrier said in a Shanghai stock exchange statement yesterday. The takeover has been approved by government agencies including the State-Owned Assets Supervision and Administration Commission, the aviation regulator and the securities watchdog, it added.
 
China Eastern has posted losses in three of the past four years, and forecast a loss for this year as it struggles with debt and growing competition. The carrier has drawn up a list of 256 cost-cutting measures, delayed planes and sold a stake in a unit in a bid to return to profit.
 
The merger will lower operational costs and improve China Eastern’s profitability, Liu Jiangbo, a spokeswoman for the carrier, said in a statement on its Web site today.
 
China Eastern Chairman Liu Shaoyong has said that there will be no job cuts following the takeover. That would leave the combined airline with about twice as many employees per plane as Air China Ltd., the nation’s No. 2 carrier at present. China Eastern’s recently announced plan to boost its presence in Beijing may partly be a response to its growing workforce, said Jack Xu, an analyst at Sinopac Securities Asia in Shanghai.
 
Share Sale
 
The carrier “will face a major problem in terms of the number of employees,” he said. Still, “the merger will improve the new airline’s pricing power.”
 
China Eastern will have a 47 percent market share in Shanghai following the takeover, according to China International Capital Corp. its financial adviser on the deal.
 
China Eastern intends to sell 1.35 billion Shanghai-listed shares costing at least 4.75 yuan each to as many as 10 investors, according to yesterday’s statement. Its parent will buy as many as 490 million of the shares. State-controlled China Eastern Air Holding Co. will also buy 490 million new Hong Kong- listed shares for at least HK$1.40 apiece.
 
The parent company has gotten 9 billion yuan in capital from the central government since December. It has already used 7 billion yuan to buy new shares in China Eastern. Shanghai Air, controlled by the city government, announced a 1 billion yuan capital injection in February.
 
Market Share
 
Following the combination with Shanghai Air, China Eastern will have about 306 planes and some 50,000 employees. It will raise China Eastern’s market share in Shanghai from 35 percent. By comparison, Beijing-based Air China has a 46 percent share in its home city, while China Southern Airlines Co. has 48 percent of its local market, Guangzhou. The airlines, the nation’s three largest, dominate Chinese air travel.
 
China Eastern plunged to a loss last year as the slowing economy led to a 4.9 percent drop in passengers. The airline also made wrong-way bets on fuel prices. Passenger numbers jumped 35 percent in the first six months of this year as a 4 trillion yuan stimulus plan helped revive the nation’s economy.
 
The carrier has predicted a “significantly” smaller full- year net loss than last year’s 15.3 billion yuan deficit.
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