Bank of China

Past lessons should guide China Eastern shareholders

PUBLISHED : Saturday, 05 January, 2008, 12:00am
UPDATED : Saturday, 05 January, 2008, 12:00am

No mainland deal has made as much noise as the proposed marriage between China Eastern Airlines Corp and Singapore Airlines.

The bleeding mainland carrier is selling a 25 per cent stake to its Singaporean peer and Temasek Holdings for HK$3.80 per share, hoping to garner money and expertise.

Its rival and shareholder, Air China, calls the deal cheap and strategically wrong for the country, and has threatened to launch a hostile bid which is rumoured to be priced at HK$5.

The public bickering has drawn a lot of attention and will continue to do so until the deal is put to vote on Tuesday. But the real issue is how can this have happened and what does it tell us about the political and business environment in the mainland?

Never have two centrally owned enterprises been seen in such open play. This is because appointments of major corporate management remain firmly in the hands of the party.

Despite all the claims of upholding shareholders' interests and respect for the market, Beijing can still manage to arm-twist corporations into a unified voice if there is a strong political will.

China Eastern's confidence in the deal is based on this. However, as Air China skilfully drums up the share price of China Eastern, the political will in Beijing is withering and two political taboos kick in.

The first is the so-called cheap sale of state assets to foreigners.

No mainland official would dare ignore this when foreigners are seen to be pocketing billions of dollars by grabbing mainland bank stakes at low valuations and when congressional criticism has made national headlines.

In fact, mainland regulators have recently rejected various acquisitions of domestic companies by foreigners citing price concerns, even when shareholders have already said yes and trading prices have been driven up by asset bubbles.

Goldman Sachs (China Eastern's adviser in the Singaporean deal) underwent this bitter experience when it proposed buying a 10.7 per cent stake in the cash-thirsty home appliance maker Midea, but was barred by the securities regulator. The bid price was less than half of the trading price.

In this case, a source close to the Singaporeans admitted: 'The growing gap between the market price and the bid price has made the decision very difficult [for the officials].'

Temasek added salt to the wounds with its recent decision to cash out its holdings in Bank of China, China Construction Bank Corp and China Cosco Holdings for HK$11.04 billion in late November. It got the stakes as a cornerstone investor before the public offerings.

Making an over 60 per cent return on the sale, Temasek is labelled as a 'buy-low, sell-high speculator', alienating more supporters of the China Eastern deal.

The second taboo is the loss of strategic industries (and national security, as the conservatives suggest) to foreigners.

Ever since the United States barred CNOOC from acquiring Unocal Corp, there has been a growing voice in Beijing questioning whether major enterprises, in particular those in strategic industries, should be sold to foreigners.

The old belief of giving up company stakes in return for capital and expertise is being loudly questioned.

Air China has played up this concern, alleging that the Singaporeans are not interested in helping China Eastern but rather in gaining the aviation hub in Shanghai. Air China suggests Singapore wants a share swap and co-operation with China Eastern to fend off foreign rivals.

All these issues would have been easier to manoeuvre had it not been a time of reshuffling at the ministerial level.

Although state-level appointments have been largely settled, ministers remain uncertain of their positions because Beijing has opted for the status quo to ensure stability before the Olympic Games in August.

Given the high political risk, it is difficult to imagine policymakers sticking their necks out to back the controversial deal. Throw into this pot the conflicting interest between different departments and you get a deafening silence from Beijing on the China Eastern deal.

For some of you who have been following mainland business news, there may be a sense of deja vu.

Indeed, the bickering over China Eastern is in many ways a replay of the stalemate around the sale of Xuzhou Construction Machinery Group to the US private investment fund Carlyle Group, but on a much bigger scale and with more influential players.

Xuzhou planned to sell control to Carlyle, but rival Sany Group criticised the deal as too cheap and dangerous for national security, threatening a counter bid.

After almost three years of lobbying and various compromises by Carlyle, the deal still has not been approved.

The reason I bring up this apparently unrelated deal is that if history is any guide, the best choice for China Eastern shareholders is to neither vote yes nor no on the acquisition on Tuesday in the hope of a better deal, but to sell the stock now.