After four months of negotiation, Air China has become the majority stakeholder in Shenzhen Airlines by purchasing additional capital in the company for 682 million yuan (US$99.8 million).
China's third-largest airline increased its stake in Shenzhen Airlines to 51 percent from 25 percent, which analysts say will help the Beijing-based carrier establish a foothold in southern China. It has long sought a hub in the Pearl River Delta to compete with Guangzhou-based China Southern Airlines, the nation's largest carrier.
Analysts said they are surprised at the low price that Air China paid.
"This is a pretty good bargain," one said. "In 2005, Huirun Investment Company bought a 65-percent stake in Shenzhen Airlines for 2.72 billion yuan."
The price was set based on Shenzhen Airlines' assets and discussed by shareholders, Air China said in stock exchange filing.
Shenzhen Airlines lost 864 million yuan on revenue of 12 billion yuan in 2009, according to a government audit found in December. It also found that the company, which claimed to have made profits for 13 consecutive years, was facing insolvency.
But former president Li Kun announced in December that Shenzhen Airlines made 500 million yuan in profit in the first 11 months of the year.
A senior official at Shenzhen Airlines said good operations doesn't necessarily guarantee a fine fiscal status. He also said the debts were partly because some assets were diverted from the company earlier.
The audit was conducted following an investigation of Li Zeyuan, chairman of Shenzhen Airlines' former largest shareholder, Huirun Investment, for unspecified economic crimes. His 65-percent stake became the target of domestic aviation players, but because Huirun Investment filed for bankruptcy, the stake is no longer for public sale.
The investigation also allowed Air China to take control of management.
"Although Shenzhen Airlines currently has financial difficulties, we still chose to control a majority stake because we believe its profitability and synergy will be created out of our cooperation," a management official at Air China said.
According to a Citibank report, through the capital injection and its investment in Hong Kong's Cathay Pacific Airways, Air China will catch up with China Eastern Airlines another of the big three state-controlled carriers in market share.
The deal is still subject to the approval of the Shenzhen government and securities regulatory commission.
