Singapore Airlines buys stake in China Eastern Airlines

Singapore Airlines, China Eastern Airlines, China Eastern Air Holding and Lentor Investments, a wholly owned subsidiary of Temasek Holdings (Private) Limited, have signed a Heads of Agreement (HOA) which sets out the framework for a co-operative partnership in conjunction with a proposed strategic investment in CEA by SIA and Temasek (which owns 54.8% of SIA).

The HOA identifies several elements, including the financial investment, management participation, commercial partnership and cooperation.

Under the HOA, it is proposed that SIA will subscribe for new H-shares of CEA at a subscription price of HK$3.80 per H-share. The last closing price of CEA’s H-shares was HK$3.73 per H-share as at 21 May 2007, being the last trading day prior to the suspension of trading CEA shares.

SIA proposes to subscribe for 1,235,005,263 new H-shares for a total consideration of approximately HK$4.7 billion, being an amount which is less than 5% of SIA's market capitalisation on Friday 31 August 2007, which will result in SIA holding a 15.7% stake in a recapitalised CEA following completion of the transaction. Minority shareholder protection will be established for SIA in respect of certain major corporate actions taken by CEA.

Temasek, through Lentor, proposes to subscribe for 649,426,737 new H-shares for a total consideration of approximately HK$2.5 billion, which will result in Lentor holding a 8.3% stake in a recapitalised CEA following completion of the transaction.

SIA will be granted a right to subscribe for new shares in proportion to its shareholding in the event of a further placement of CEA shares, as well as a future right to increase its stake at a time when foreign ownership restrictions imposed by the Government of the People’s Republic of China may be liberalised. Both SIA and CEA Holding will have a right of first refusal over shares in CEA sold by the other party. CEA Holding will also subscribe for 1,100,418,000 new H-shares for a total consideration of approximately HK$4.2 billion, which will result in CEA Holding having a 51% stake in a recapitalised CEA following completion of the transaction.

Commensurate with its stake in CEA, SIA will be entitled to nominate two representatives to the Board of Directors of CEA. A Board Finance Committee will be established, which will include representation from SIA.

CEA will be sending executives to SIA for attachments and training programs. SIA will also be seconding management executives to key positions in CEA. These proposed management exchanges will enable both organisations to share proven practices and establish closer co-operation.

SIA and CEA have international route networks that complement each other, with little overlap. CEA also has a big domestic network in China, with hubs in Shanghai, Wuhan, Kunming and Xian.

In the spirit of this commercial partnership, CEA and CEA Holding will not issue new shares nor sell any existing shares to SIA’s competitors, and SIA will not invest in other PRC-based airlines, except for Great Wall Airlines, in which it has an existing interest.

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