China Eastern Airlines said it will acquire rival Shanghai Airlines, a 9 billion yuan deal ($1.3 billion) which will create a newly capitalized carrier with more than half the air business in China's financial hub.
Both airlines rose by their 5 percent daily limit in Shanghai on Monday on the share-swap deal. China Eastern's Hong Kong-listed shares rose as much as 14.4 percent in early trade to an 11-month high.
Analysts said the initial price euphoria over the deal would subside. Shares for both companies had been suspended since early June pending an announcement on the highly anticipated merger.
The merger is beneficial in the long term as China Eastern's market share will be greatly enlarged. But in the short-term, money matters continue to be an overhang, said Linus Yip, strategist with First Shanghai Securities.
The initial stock reaction seems to have captured most of the positive news in the announcement so in the short term investors will do well to sell the stock, he said.
Under their plan, each share of Shanghai Airlines would be exchanged for 1.3 China Eastern shares, according to a Shanghai Stock Exchange filing. That ratio equates to a premium of about 17 percent to Shanghai Airlines last stock price before the trading suspension.
Shanghai Airlines shares would be delisted after the swap.
The broader plan would also see China Eastern raise about 7 billion yuan by selling up to 1.35 billion new yuan-denominated A-shares to 10 selected institutions for at least 4.75 yuan each; and as many as 490 million H shares to a related company in Hong Kong for at least HK$1.4 each.
That capital raising would follow another 7 billion yuan cash injection from its state-owned parent earlier this month via A- and H-share issues.
These new funds, plus the integration of rival Shanghai Airlines, effectively relaunches the carrier, Merrill Lynch wrote in a research note. It will dominate the Shanghai market and offers an interesting restructuring play for investors.
The merger between the two loss-making carriers will create an airline that can compete more effectively with domestic rivals Air China and China Southern Airlines.
Merrill Lynch said the deal should help China Eastern's pricing and profits, but added failure to cut headcount and aircraft means the combined entity is leaving major cost cutting opportunities untouched.
Citigroup said the merger would help pricing by ending a price war between the cross-town rivals, immediately boosting China Eastern's earnings by 1 billion yuan, and up to as much as 3 billion yuan.
WEAK AIR TRAVEL
Shanghai Airlines is the smaller of the two companies, operating a fleet of 66 planes at the end of last year. China Eastern operated 240 planes at that time.
Chinese carriers have been grappling with weak air travel demand amid high fuel prices and slower economic growth. The country's top three airlines lost more than $4 billion in 2008 after years of double-digit growth.
China Eastern shareholders who do not want to conduct a share swap can exercise a cash option that would grant 5.25 yuan for each A share and HK$1.56 for each H share, while Shanghai Airline shareholders can choose to get 5.5 yuan in cash for each share they own, the statement said.
Shanghai Eastern will become a wholly-owned subsidiary of China Eastern while retaining its brand and independent operations, the official Xinhua news agency said late on Sunday, citing Liu Jiangbo, spokesman of the team overseeing the tie-up.
(Additional reporting by Jacqueline Wong and Donny Kwok; Editing by Doug Young and Valerie Lee)