Singapore (XFN-ASIA) - China Eastern Airlines Corp Ltd said
it has reached an agreement allowing Singapore Airlines to buy a stake in the
A company official told XFN-Asia that the talks have been concluded, but he declined to give further details, saying an official announcement will be made on or before Friday.
"The statement has something to do with our talks with Singapore Airlines," he said.
In a statement sent to the Singapore Exchange, SIA said it in advanced stage of talks for potential investment, without identifying the said investment target.
"At this stage, the agreement has not been finalized and is subject to official approval," SIA said.
"We expect to provide an update to investors as soon as possible on the outcome of such discussions, and will make an appropriate announcement in the event that we enter into any definitive agreement as regards the investment ," it said.
Analysts said that while the possible acquisition of a stake in China Eastern Airlines is positive for SIA in the longer term, the key challenge for SIA is the restructuring of the loss-making airline.
"The huge losses of 3.3 bln yuan in 2006 cut Chinese Eastern Airlines' book by 55 pct to 2.6 bln yuan or 0.57 yuan per share... Its net gearing was 19 times, indicating that the company is getting close to bankruptcy at a quicker than expected pace," Citigroup said in a note.
"This is not a bad deal for SIA... However, how to turnaround China Eastern Airlines is very challenging," it added.
Citigroup estimates that SIA will have to pay 4 bln yuan assuming it buys a 25 pct stake in China Eastern Airlines at the brokerage's target price of 3.35 hkd per share.
Buying into China Eastern Airlines will give SIA a sizeable share of the domestic travel market in China, in which China Eastern Airlines has a 40 pct share, Citigroup said. Additionally, SIA will have access to China Eastern Airlines fleet of 202 aircraft and intensive domestic and international networks from China, it added.