Hong Kong (XFN-ASIA) - Goldman Sachs says that Singapore Airlines
(SIA) may have to pay 19.8 bln yuan for a 25 pct stake in China Eastern Airlines
CEA is reported to be selling 20 to 25 pct of the company to Singapore Airlines, details of which are expected to be confirmed on or before Friday.
Goldman said that state ownership in CEA could fall to 51 pct from the current 59.7 pct under the terms of the deal.
The estimates are based on the assumption that the Chinese airline will issue 2 bln H-shares to SIA and 1.3 bln A-shares to the parent, state-owned China Eastern Air Holding Co, the investment firm said.
"Assuming the deal is priced at yesterday's closing prices and using an exchange rate of 1.0 hkd = 1.0 yuan, a 25 pct stake would translate into (a) 19.8 bln equity injection into CEA and increase the total number of shares to 8.179 bln," it said.
Goldman said it expects the 2008 estimated book value per share for CEA would rise to 2.92 from 0.83 and CEA's 2008 estimated net debt against equity would fall to just 193 pct from 1,620 pct.
"We expect the market to react very positively (to the deal), given that it would help CEA strengthen its balance sheet and add SIA's formidable operational expertise," it said.
It added that "given CEA's very high operational leverage, even modest operational improvements arising from SIA's strategic stake would substantially boost CEA's profitability and book value."
Goldman said the deal also would be positive for SIA, as it would give it a foothold in the booming Chinese market, help feed traffic into SIA's extensive global network and potentially help it to gain further traffic rights out of Shanghai.
CEA shares remain suspended, following on from yesterday. It last traded at 3.73 hkd.