Carrier's bid needs more explanation

Liang Hongfu

2008-02-19 02:28:39  China Daily      

Singapore Airlines (SIA) reportedly has reiterated it remains keen on winning the bid for a "strategic" minority stake in Shanghai-based China Eastern.

Senior executives of SIA and its affiliate Temasek Holdings were quoted as saying they would continue to try to win the support of the mainland carrier's shareholders.

This is not going to be an easy task.

In the stock market, money usually talks the loudest. The Singapore companies' offer to buy a 24 percent stake in China Eastern at HK$3.8 a share has been trumped by a counter-bid from the mainland's largest carrier Air China at HK$5 a share.

Calling on China Eastern shareholders to consider the potential long-term benefits of the proposed alliance, SIA executives repeated the argument that their company can help the mainland carrier to improve its management and services if the transaction goes through. This injection of "expertise" is part and parcel of the offer, the SIA officials said.

To convince China Eastern shareholders to change their minds and accept a lower valuation of their company's shares, SIA would need to provide significantly more information to substantiate its claims. To be sure, SIA has won international acclaim for its service and business strategy. But it does not have a monopoly on excellence in the industry.

Its main rival in the region, Cathay Pacific, a strategic partner of Air China, has also enjoyed a sterling reputation for service and management expertise. The much smaller Dragon Air, a unit of Cathay, has remained a carrier of choice for many frequent flyers on routes between Hong Kong and various major mainland cities.

Of more relevance to China Eastern shareholders is how soon could the claimed benefits from an alliance with SIA be reflected in a substantial increase in the underlying value of the company's shares. For a start, it is not clear what the SIA executives meant by "long-term" value of the proposed partnership with China Eastern.

The great economist Maynard Keynes once wrote: "In the long run, we are all dead. In much more subdued rhetoric, the stylebook of the business newspaper I used to work at defines 'long-term' as five years and beyond. Such a long wait would certainly stretch the patience of most stock investors."

It is common wisdom that the performance of a stock market at any point in time reflects investors' expectations no more than six months ahead. Of course, many institutional investors, including pension funds and insurance companies, usually hold a portion of their portfolios in blue-chip stocks, such as banks, utilities and industrial enterprises, as long-term investments.

But airline companies do not normally fall into this category of stocks because their businesses are often influenced by such highly unpredictable external factors as domestic and international regulatory environments, oil price fluctuations, stiff global competition and travelers' whims.

What Easter Airlines shareholders need to properly evaluate i.e. SIA's offer, which must be seen together with the proposed expertise injection, are some key short-term projections on financial performance and business expansion that can be used to quantify the longer-term benefits to their company.

There is no doubt that SIA must have built a business model for the proposed alliance with China Eastern. Perhaps SIA would want to consider sharing some of that wisdom with China Eastern shareholders so that they can make a more informed judgment on the offer.