China National Aviation Corp (CNAC) yesterday disclosed the details of the proposal it submitted to China Eastern last Friday, while China Eastern said the bid is informal and doesn't conform to legal procedures.

The market reaction was prompt: Air China's H shares plunged 15 percent to HK$8.38 yuan, while its A shares were suspended from trading yesterday. China Eastern's A shares fell 3.58 percent after an hour-long suspension in the morning.

China Eastern's proposal to sell a 24 percent stake to Singapore Airlines and Temasek at HK$3.8 per share was rejected by its shareholders on January 8 after CNAC came up with a counteroffer.

CNAC plans to buy 2.985 billion H shares of China Eastern at a price of no less than HK$5, according to CNAC's proposal tendered to the board of directors of China Eastern on Jan 18.

CNAC pointed out that it does not "intend to hold 30 percent or more of the total issued shares in China Eastern after such new share issue".

China International Capital Corporation Ltd (CICC), financial advisor of CNAC, said the proposal "will effectively improve the financial position of China Eastern and the operating results of the airline".

China Eastern will receive no less than HK$14.9 billion in cash after the two parties agree on the proposal, and the company's ratio of liabilities to assets is expected to decrease from the current 94.3 percent to less than 77 percent, according to CICC.

In addition, the deal is expected to help China Eastern to save more than 776 million yuan per year in interest expenses and would bring a synergy of more than 5 billion yuan per year to the two airlines, with an income increase of around 4 billion yuan and a cost reduction of around 1 billion yuan, said CICC.

CNAC said it would cooperate with China Eastern to establish an aviation hub operation system in Shanghai, set up an air cargo joint venture to integrate the cargo business and conduct comprehensive cooperation in various business areas.

In an e-mail on Sunday, China Eastern said: "Air China only submitted 'a letter', not 'a formal proposal' that CNAC mentioned in the statement on Jan 7," adding that CNAC has not submitted a letter of authority from its board or the president of the board.

"We doubted the sincerity of CNAC's bid and expected CNAC would submit a 'formal proposal' before the time limit mentioned in their statement."

(China Daily January 22, 2008)