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China Eastern to merge with Shanghai Airlines through a shares swap

Jul 12, 2009

China Eastern Airlines Corp., releasing details of its agreed takeover of Shanghai Airlines Co., offered about 9 billion yuan ($1.3 billion) as it seeks to dominate 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. Both carriers have been halted since then pending yesterday’s announcement.

Buying Shanghai Air will boost China Eastern’s market share in its home city to more than 50 percent and give it a fleet larger than Air China Ltd., the nation’s second-biggest carrier. The government backed a deal after bailing out the two Shanghai- based airlines, which had combined losses of 16.5 billion yuan last year.

“The merger will improve the new airline’s pricing power,” said Jack Xu, an analyst at Sinopac Securities Asia in Shanghai. “Still, it will face a major problem in terms of the number of employees.”

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. China Eastern’s recently announced plan to boost its presence in Beijing may partly be a response to its growing workforce, Xu said.

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. China Eastern the country’s third-largest carrier, will resume trading in Shanghai and Hong Kong today, it said.

Government Backing

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 China’s cooling economy stymies travel demand. The carrier has drawn up a list of 256 cost-cutting measures, delayed planes and agreed to sell a stake in a unit in a bid to return to profit.

Share Sale

The carrier will also raise 7 billion yuan selling new shares, according to yesterday’s statement. These include 1.35 billion Shanghai-listed shares, costing at least 4.75 yuan each, which will be sold to as many as 10 investors, including its parent. In Hong Kong, the carrier will sell 490 million shares for at least HK$1.40 apiece to its parent.

State-controlled China Eastern Air Holding Co. has gotten 9 billion yuan in capital from the central government since December. Shanghai Air, controlled by the city government, announced a 1 billion yuan capital injection in February.

The combined group 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 12 percent in the first four 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.

China Eastern to merge with Shanghai Airlines through a shares swap
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