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September 02, 2007

China Eastern Airlines Sells Stake to Singapore Airlines - After 3 Month Trading Halt

posted by MR WAVETHEORY at 9/02/2007 04:35:00 AM
China Eastern Airlines Corp. Ltd. (ADR) (NYSE CEA) has been halted since May 25, 2007. Normally, when a stock is halted from trading for over 3 months, something bad happens, like the company goes out of business. In China Eastern's case, something good happened. China Eastern, which has been losing money hand over fist and is the never do well of the Chinese airlines, has raised $1 billion from Singapore Airlines Ltd. and Temasek which the Government Investment Corporation of Singapore's investment arm. This couldn't be more ironic because Singapore Airlines (SG S55) is also the world's most successful airline and the largest airline by market cap! Paired up with the orphan child of the Chinese airline industry, one can only hope that it will turn things around at CEA.

Bloomberg says that Singapore Airlines has a history of making poor strategic investments. In fact, they cite how Singapore Airline's investment in Air New Zealand was made just before it went into bankruptcy reorganization. Forbes writes that Singapore Airline's 49% stake in Virgin Atlantic Airways is another black mark on their investment track record. It's fair to say that Singapore Airlines is probably better as airline operators than as airline investors. At least, that's what the CEO was trying to suggest when he stated that he will be very hands on in managing and operating China Eastern.

I doubt a turnaround at CEA will be easy, but Singapore Airlines is the best there is in the airline industry so if anyone has a chance, it is Singapore Airlines. They have a 25% stake (less economically, but from a control perspective, Temasek and Singapore Airline's stake really should be regarded as one block of stock). That is sufficient to get the ball rolling, but what is disconcerting is that they only got 3 board seats. You see, the board at CEA is only getting expanded from 11 seats to 14 seats. To really make things fair, the investors really should have gotten 4-5 seats. After all, the investors are bringing in $1 billion dollars! Whoever negotiated the deal really should go back to the drawing board and think about the value they received and the value they gave. All in all, I think CEA will turnout to be a good investment. CEA's hub is based in Shanghai which is becoming the financial center of China and Asia. The Singaporeans have the wind behind their backs this time around and it's good to own one of the top 3 airlines in China!

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3:19 AM  

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