Cathay Pacific Airways Ltd (
They announced they had given up their own bid for a piece of China's No. 3 carrier, whose Shanghai gateway could now give the Singapore airline a valuable entry into what has become one of the world's top aviation markets.
Air China said in a separate statement that it would not bid for China Eastern shares for three months. It didn't say whether it would revisit the proposal after that time.
A spokeswoman for Air China said she did not know why the bid was called off, but a source familiar with the negotiations said that political pressure in China had helped thwart the bid.
Singapore Airlines (SIA) had already received government approval from Chinese authorities for its bid, and is now awaiting the green light from shareholders at an extraordinary general meeting later this year.
Cathay and Air China's parent China National Aviation Holding Co (CNAHC,
SIA and Temasek are planning to buy a combined 24 percent stake in China Eastern for US$923 million, giving them a foothold in the fast-growing Chinese aviation market.
Shares in both Air China and Cathay Pacific had both been suspended ahead of any announcement. Their share prices tumbled in Hong Kong yesterday following news that the deal was off.
A person close to the deal said that Air China was the driving force in the bid for the China Eastern stake. Cathay Pacific was going along because it and Air China have cross holdings, said the person, who declined to be named because the source wasn't authorized to speak to the press.
A source familiar with the deal, who did not want to be named, also said Chinese authorities had played a crucial role in scuppering the bid, which was being driven by CNAHC.
Analysts also believed Chinese authorities played a role.
"We believe top regulators in China could have played an active role in persuading Cathay management to abandon the China Eastern deal," said Chin Lim (
Meanwhile, Merrill Lynch downgraded its rating on Air China and China Eastern to "sell."
The attraction for both airlines was China Eastern's Shanghai service. Sixteen of the 32 daily flights between Hong Kong and Shanghai are operated by Cathay Pacific and Dragonair (
With China Eastern operating 13 and Shanghai Airlines (
"Many foreign carriers want to enter China but the market is still sealed off, so they turn to buying stakes in domestic airliners," said Jack Xu, a Shanghai-based analyst with SinoPac Securities Asia Ltd. "Clearly, the authorities want to create competitive airline companies, and they have two options: restructuring the companies with capital injections from government or bringing in advanced foreign players to improve the efficiency."
China Eastern has a 35.4 percent share of total weekly airline seats at Shanghai's Pudong and Hongqiao airports, while Air China has 9.1 percent and Cathay Pacific-controlled Dragonair 3.5 percent.
The Center for Asia Pacific Aviation (CAPA), an industry consultancy, said the bid was just the start of stepped-up competition over China's aviation market.
"Asia-Pacific aviation has come within a whisker of a massive power struggle between two of its most influential airlines," CAPA said. "Even with Cathay's backdown, that new competitive era has now dawned."
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