Air China Regulatory News (AIRC)

22 Jun 2006 07:02

Air China Ld22 June 2006 The Stock Exchange of Hong Kong Limited takes no responsibility for the contentsof this announcement, makes no representation as to its accuracy or completenessand expressly disclaims any liability whatsoever for any loss howsoever arisingfrom or in reliance upon the whole or any part of the contents of thisannouncement. This announcement appears for information purposes only and does not constitutean invitation or offer to acquire, purchase or subscribe for securities of AirChina Limited or China National Aviation Company Limited. AIR CHINA LIMITED CHINA NATIONAL AVIATION COMPANY LIMITED (Incorporated in the PRC with limited (Incorporated in Hong liability under Kong under the Companies the Company Law of the PRC) Ordinance of Hong Kong with limited liability) (Stock Code: 753) (Stock Code: 1110) JOINT ANNOUNCEMENT Proposed Pre-Conditional Privatisation of China National Aviation Company Limited by Air China Limited By way of a Scheme of Arrangement under Section 166 of the Companies Ordinance and Possible Discloseable Transaction of Air China Limited Exclusive financial advisers to Air China Limited CHINA INTERNATIONAL CAPITAL Merrill Lynch (Asia Pacific) CORPORATION (HONGKONG) LIMITED Limited Financial adviser to China National Aviation Company Limited in relation to the Proposed Pre-Conditional Privatisation of China National Aviation Company Limited Citigroup Global Markets Asia Limited Air China and CNAC jointly announce that, subject to satisfaction of thePre-Condition, Air China will make the Proposals to privatise CNAC by way of ascheme of arrangement under Section 166 of the Companies Ordinance. TheProposals are made at the request of the CNAC Board who believes the Proposalsto be in the interest of CNAC. Pursuant to the Share Proposal, all Scheme Shares will be cancelled in exchangefor the Share Proposal Price of HK$2.80 in cash for each Scheme Share. As at thedate of this announcement, the Scheme Shareholders are interested in1,048,052,000 Shares, representing approximately 31.6% of the issued sharecapital of CNAC. In parallel with and separate from the Share Proposal, Air China will make theOption Proposal to purchase the Outstanding Options, for cancellation inexchange for HK$1.66 in cash for each Outstanding Option, subject to andconditional upon the Scheme becoming effective. Save and except for the Options outstanding as at the date of this announcement,there are no outstanding options, warrants, derivatives or other securitiesissued by CNAC that carry a right to subscribe for or which are convertible intoShares. As the Proposals are initiated by the CNAC Board, Air China has the full supportof CNAC's executive management team to implement the Proposals and to privatiseCNAC. The total amount of cash required for the Proposals is approximately HK$3,226.8million, assuming all the Options are exercised prior to the Option ExerciseDate. Air China intends to fund the cash required to effect the Proposals fromfinancing arranged through bank borrowings. Air China's exclusive financialadvisers, CICC and Merrill Lynch, are satisfied that sufficient financialresources are available to Air China for the implementation of the Proposals. If the Scheme is implemented, the listing of the Shares on the Stock Exchangewill be withdrawn. The Scheme is subject to the satisfaction or waiver, asapplicable, of the Pre-Condition and the Conditions. Upon the Scheme becoming effective, CNAC will become a wholly owned subsidiaryof Air China. Air China reserves the right to implement the Scheme through one or more of itswholly owned subsidiaries. Air China also reserves the right to implement theProposals by way of a general offer prior to the despatch of the SchemeDocument. The Independent Board Committee, comprising all non-executive directors of CNAC,other than Mr. Hu Hung Lick, Henry who is also an independent non-executivedirector of Air China, has been appointed to advise Independent SchemeShareholders and Optionholders in respect of the Share Proposal and the OptionProposal, respectively. CLSA Equity Capital Markets Limited has been appointed as the independentfinancial adviser to advise the Independent Board Committee in connection withthe Proposals. Such appointment has been approved by the Independent BoardCommittee. Subject to the High Court's approval for the despatch of the Scheme Documentbeing obtained, the Scheme Document will be despatched to Shareholders andOptionholders within seven days upon satisfaction of the Pre-Condition, or assoon as practicable thereafter, in accordance with the requirements of theTakeovers Code. Assuming Air China and CNAC each despatches its notice ofmeetings and circular to shareholders to consider and approve the transactionscontemplated by the Restructuring Agreement by 30 June 2006, the RelevantShareholders' Meetings are expected to take place in the second half of August2006. As the Restructuring cannot be effected until after the shareholders ofAir China and the shareholders have approved the Restructuring, thePre-Condition is not expected to be satisfied until after the holding of theRelevant Shareholders' Meetings. The Scheme Document will include, among otherthings, further details of the Proposals and the Scheme, the expected timetable,the recommendations of the Independent Board Committee in respect of theProposals, a letter of advice from the independent financial adviser to theIndependent Board Committee, an explanatory statement as required under theCompanies Ordinance, and notices of the Court Meeting and the ExtraordinaryGeneral Meeting. Shareholders, Optionholders and/or potential investors in CNAC should be awarethat the making of the Proposals is subject to satisfaction of the Pre-Condition(namely, the completion of the transactions contemplated by the RestructuringAgreement), and the implementation of the Proposals is subject to satisfactionor waiver (as applicable) of the Conditions. In particular, if the Restructuringis not completed, the Proposals will not be made. Even if the Proposals aremade, the Proposals may or may not become effective. Accordingly, Shareholders,Optionholders and/or potential investors in CNAC are advised to exercise cautionwhen dealing in Shares and/or Options. INTRODUCTION Air China and CNAC jointly announce that, subject to satisfaction of thePre-Condition, Air China will make the Proposals to privatise CNAC by way of ascheme of arrangement under Section 166 of the Companies Ordinance. TheProposals are made at the request of the CNAC Board who believes the Proposalsto be in the interest of CNAC. If approved, the Scheme will be binding on all Scheme Shareholders, irrespectiveof whether or not they attended or voted at the Court Meeting or theExtraordinary General Meeting. 2,264,642,000 Shares held by Air China and itsConcert Parties, representing approximately 68.4% of the existing issued capitalas at the date of this announcement, and 66.3% of the enlarged issued sharecapital, assuming the Options are exercised in full prior to the Option ExerciseDate, will not form part of the Voting Shares. As such, Air China and itsConcert Parties are required to abstain from voting at the Court Meeting. The14,000 Shares currently held by a Concert Party will however form part of theScheme Shares. In addition, an Optionholder, who exercised his or her Optionprior to the Record Date, would also be required to abstain from voting at theCourting Meeting for the reasons set out in the paragraph headed "GeneralInformation", but the Option Shares will form part of the Scheme Shares. THE SHARE PROPOSAL AND THE OPTION PROPOSAL Subject to the satisfaction of the Pre-Condition, Air China will make theProposals on the following basis: The Share Proposal For each Scheme Share HK$2.80 in cash The Option Proposal For each Outstanding Option HK$1.66 in cash PRE-CONDITION TO MAKING THE PROPOSALS The making of the Proposals is conditional upon completion of the transactionscontemplated under the Restructuring Agreement, details of which are set out inthe Restructuring Announcement (the Pre-Condition). If the Pre-Condition is not satisfied, the Proposals will not be made. Air Chinawill, to the extent that it is within its power to do so, use its reasonableefforts to ensure that the Pre-Condition will be satisfied as soon aspracticable. The Share Proposal The Share Proposal involves the following principal steps, all of which willoccur on the Effective Date: (a) the share capital of CNAC will be reduced by canceling the Scheme Shares; (b) CNAC will apply the credit arising in its books of account as a result ofthe reduction of capital to pay up in full, at par, a number of New Shares whichis equal to the number of Scheme Shares cancelled, and the New Shares will beallotted and issued, credited as fully paid, to Air China or its nominees (whichmay include a subsidiary of Air China); and (c) in consideration for the cancellation of the Scheme Shares and theallotment and issue of New Shares to Air China or its nominees, SchemeShareholders will receive HK$2.80 in cash per Scheme Share. Comparisons of value The Share Proposal The Share Proposal Price represents: (a) a premium of approximately 65.9% over the average closing price ofapproximately HK$1.69 per Share for the six months up to and including the LastTrading Date; (b) a premium of approximately 50.3% over the average closing price ofapproximately HK$1.86 per Share for the three months up to and including theLast Trading Date; (c) a premium of approximately 49.8% over the average closing price ofapproximately HK$1.87 per Share for the last 30 trading days up to and includingthe Last Trading Date; (d) a premium of approximately 52.2% over the average closing price ofapproximately HK$1.84 per Share for the last 10 trading days up to and includingthe Last Trading Date; (e) a premium of approximately 45.8% over the average closing price ofHK$1.92 per Share for the last five trading days up to and including the LastTrading Date; (f) a premium of approximately 42.1% over the closing price of HK$1.97 perShare as quoted on the Stock Exchange on the Last Trading Date; (g) a premium of approximately 199.9% over the audited net asset value perShare of approximately HK$0.93 as at 31 December 2005, equivalent to a multipleof 3.0x net asset value (adjusted for year-end dividends) of CNAC of HK$3,092.7million and 3,312,680,000 Shares in issue as at 31 December 2005; and (h) a price earnings multiple of approximately 41.2x based on the audited netprofit attributable to Shareholders of approximately HK$225 million for thefinancial year ended 31 December 2005 and 3,312,680,000 Shares in issue as at 31December 2005. The Option Proposal In accordance with the terms of the Share Option Scheme, Optionholders areentitled to exercise their Options, which confer on them rights to subscribe forShares at a price of HK$1.14 per Share, in full or in part at any time up to theOption Exercise Date. Shares issued upon exercise of the Options in accordancewith the terms of the Share Option Scheme prior to the Record Date will formpart of the Scheme Shares. If the Scheme becomes effective, Options which arenot exercised in accordance with the terms of the Share Option Scheme willlapse. Under the Option Proposal, Air China will offer to purchase Outstanding Options,for cancellation in exchange for HK$1.66 in cash for each Outstanding Option,subject to and conditional upon the Scheme becoming effective. Furtherinformation on the Option Proposal will be set out in the Scheme Document andthe Option Proposal will be made by or on behalf of Air China in a letter toOptionholders to be despatched on the same day as the Scheme Document. Trading Prices The highest and lowest prices at which Shares were traded on the Stock Exchangein the six-month period immediately prior to the Last Trading Date were HK$2.10on 6 April 2006 and 10 April 2006 and HK$1.40 on 13 December 2005, 15 December2005 and 16 December 2005, respectively. Total Consideration On the basis of the Share Proposal Price of HK$2.80 per Scheme Share and3,312,680,000 Shares in issue of which 1,048,052,000 are Scheme Shares as at thedate of this announcement, the Scheme Shares are valued at approximatelyHK$2,934.5 million. According to CNAC, there are 104,378,000 Options, giving rights to subscribe for104,378,000 Shares, outstanding as at the date of this announcement. There areno other outstanding options, warrants, derivatives or other securities issuedby CNAC that carry a right to subscribe for or which are convertible intoShares. Assuming that none of the Options is exercised prior to the OptionExercise Date and the Option Proposal is accepted in full, on the basis of aconsideration of HK$1.66 payable for the cancellation of each of the 104,378,000Outstanding Options, the Option Proposal is valued at HK$173.3 million. Assuming that all Options are exercised in full by Optionholders prior to theOption Exercise Date in accordance with the terms of the Share Option Scheme,the consideration payable by Air China pursuant to the Share Proposal will beincreased to approximately HK$3,226.8 million. No consideration for cancellationwill then be payable under the Option Proposal. Air China intends to fund the cash required to effect the Proposals fromfinancing arranged through bank borrowings. The financing agreement for suchbank borrowings is governed by PRC law and the performance of such agreement maybe limited by force majeure provisions under the PRC Civil Code and the PRCContract Law. Confirmation of Financial Resources CICC and Merrill Lynch, the exclusive financial advisers to Air China in respectof the Proposals, are satisfied that sufficient financial resources areavailable to the Air China to implement the Proposals. CONDITIONS OF THE PROPOSALS The Scheme will become effective and binding on CNAC and all Scheme Shareholderssubject to satisfaction or waiver (as applicable) of the following conditions: (a) the approval of the Scheme by a majority in number of the IndependentScheme Shareholders representing not less than three-fourths in value of theScheme Shares held by Independent Scheme Shareholders, present and voting eitherin person or by proxy at the Court Meeting, provided that: (i) the Scheme is approved by at least 75% of the votes attaching to SchemeShares held by Independent Scheme Shareholders that are cast either in person orby proxy at the Court Meeting (by way of poll); and (ii) the number of votes cast against the resolution to approve the Scheme atthe Court Meeting (by way of poll) is not more than 104,803,800, representing10% of the votes attaching to all Scheme Shares held by Independent SchemeShareholders; (b) the passing of a special resolution to approve and give effect to thecancellation of the Scheme Shares and the reduction of the relevant portion ofthe issued share capital of CNAC by a majority of at least three-fourths of thevotes cast by Shareholders present and voting in person or by proxy, at theExtraordinary General Meeting by way of poll; (c) the sanction of the Scheme (with or without modifications) by the HighCourt and the delivery to the Registrar of Companies in Hong Kong of an officialcopy of the order of the High Court for registration; (d) the compliance with the procedural requirements of Section 58 of theCompanies Ordinance in relation to the reduction of the issued share capital ofCNAC; (e) the receipts of all relevant authorisations, consents and/or approvalsfrom each of State Administration for Foreign Exchange of the PRC, NationalDevelopment and Reform Commission of the PRC, Ministry of Commerce of the PRC,China Civil Aviation Authority, Ministry of Finance of the PRC, State AssetsSupervision and Administration Commission of the PRC, China SecuritiesRegulatory Commission, China Banking Regulatory Commission and Hong Kong andMacau Affairs Department of the State Council necessary for the implementationof the Proposals, and all such authorisations, consents and/or approvalsremaining in full force and effect; (f) no act referred to under Rule 4 of the Takeovers Code having been orbeing proposed or threatened to be carried out by the CNAC Board; (g) since the date of this announcement, there having been no force majeureevent, including, without limitation, act of God, war, riot, public disorder,civil commotion, economic sanctions, fire, flood, explosion, epidemic,terrorism, labour dispute strike, lock-out, out-break, escalation, declarationor threat of war or hostility, or disaster which is outside Air China's controlthat would render it impossible for Air China to implement the Proposals; and (h) save for the payment of a final dividend of HK cent 1.0 per Share asapproved by the Shareholders on the annual general meeting of CNAC held on 25May 2006, since the date of this announcement and up to the Effective Date, CNACnot having declared, made or paid any dividend or distribution of any kind, andnot agreeing or proposing to declare, make or pay any dividend or distributionof any kind. Air China will use its reasonable endeavours to fulfill the Conditions which arereasonably within its powers in a timely manner. If the Conditions are notsatisfied on or before the specific date to be set out in the Scheme Document,the Scheme will lapse. The Option Proposal will be subject to and conditional upon the Share Proposalbecoming or being declared effective. Air China reserves the right to implement the Proposals by way of a generaloffer prior to the despatch of the Scheme Document. Air China also reserves theright, at its absolute discretion, to waive, in whole or in part, any of theConditions referred to in paragraphs (f) to (h) above. Conditions (a) to (e)cannot be waived by Air China. In the event that any of Conditions (a) to (e) isnot satisfied on or before the specific date to be set out in the SchemeDocument, the Scheme will lapse. Air China may only invoke any or all ofConditions (a) to (h) as a basis for not proceeding with the Scheme if theprovisions of Note 2 to Rule 30.1 of the Takeovers Code are satisfied. Note 2 toRule 30.1 of the Takeovers Code provides that an offeror should not invoke anycondition (other than the acceptance condition) so as to cause the offer tolapse unless the circumstances which give rise to the right to invoke thecondition are of material significance to the offeror in the context of theoffer. Scheme Document Subject to the High Court's approval for the despatch of the Scheme Documentbeing obtained, the Scheme Document containing, among other things, furtherdetails about the Proposals and the Scheme, the expected timetable, therecommendation of the Independent Board Committee in respect of the Proposals,the letter of advice from the independent financial adviser to the IndependentBoard Committee, an explanatory statement as required under the CompaniesOrdinance, and notices of the Court Meeting and the Extraordinary GeneralMeeting will be despatched to Shareholders and the Optionholders within sevendays of satisfaction of the Pre-Condition, or as soon as practicable thereafter,in accordance with the requirements of the Takeovers Code. Assuming Air Chinaand CNAC each despatches its notice of meetings and circular to shareholders toconsider and approve the transactions contemplated by the RestructuringAgreement by 30 June 2006, the Relevant Shareholders' Meetings of Air China andCNAC are expected to take place in the second half of August 2006. As theRestructuring cannot be effected until after the shareholders of Air China andthe Shareholders have approved the Restructuring, the Pre-Condition is notexpected to be satisfied until after the holding of the Relevant Shareholders'Meetings. A further announcement will be made regarding the expected timetablefor the Proposals. The Independent Board Committee, comprising all non-executive directors of CNAC,other than Mr. Hu Hung Lick, Henry who is also an independent non-executivedirector of Air China, has been appointed to advise Independent SchemeShareholders and Optionholders in respect of the Share Proposal and the OptionProposal, respectively. CLSA Equity Capital Markets Limited has been appointed as the independentfinancial adviser to advise the Independent Board Committee in connection withthe Proposals. Such appointment has been approved by the Independent BoardCommittee. INFORMATION ON THE CNAC GROUP Business of the CNAC Group CNAC was incorporated in Hong Kong in 1997 and was listed on the Stock Exchangeon 17 December 1997, trading under the stock code 1110. The CNAC Groups'principal activities are airline operations and aviation related businesses. The principal business activity of CNAC is that of an investment holdingcompany. Following the completion of the Restructuring Agreement, the corebusinesses of CNAC will include air transportation services (Air Macau, MacauAsia Express Limited and a minority stake in Cathay), airline catering services(Beijing Air Catering Co. Ltd., Southwest Air Catering Company Limited, and LSGLufthansa Service Hong Kong Ltd.), airport ground handling services (JardineAirport Service Ltd. and Menzies Macau Airport Services Ltd.) and logisticsservices (Tradeport Hong Kong Ltd.). According to CNAC, the number of Shares in issue is 3,312,680,000 as at the dateof this announcement and Air China and its Concert Parties are interested in2,264,642,000 Shares, representing approximately 68.4% of the entire issuedshare capital in CNAC as at the date of this announcement. Key financial information of the CNAC Group A summary of the audited consolidated results and net asset value of the CNACGroup for each of the two years ended 31 December 2004 and 31 December 2005 isset out below: For the year ended 31 December 2004 2005 HK$'000 HK$'000 Turnover 1,890,710 2,620,033Operating profit 16,733 (52,317)Profit before tax 406,808 221,966Profit after tax but before minority 394,464 211,924interests (Note 2) Profit attributable to Shareholders (Note 1) 360,969 225,000 Net asset value as at 31 December 2005 3,125,837 Earnings per share (HK Cents) 7 Net asset per share (HK Cents) 94 The above financial information is extracted from the financial statements setout in the CNAC 2005 annual report, which had been prepared in accordance withHong Kong Financial Reporting Standards and Hong Kong Accounting Standards andinterpretations issued by the Hong Kong Institute of Certified PublicAccountants. Shareholding Structure of CNAC Immediately Immediately after after the Effective the Effective Date Date and the and the Shares Shares are delisted are delisted on on As at the the Stock the Stock date of Exchange Exchange Shareholders this (Note 3) (Note 4) announcement Number of % Number of % Number of % Shares Shares Shares Air China 2,264,628,000 68.4 3,312,680,000 100 3,417,058,000 100Concert Parties 14,000 0 Nil Nil Nil NilSubtotal for Air China and Concert Parties 2,264,642,000 68.4 3,312,680,000 100 3,417,058,000 100Independent Scheme Shareholders (Note 1,048,038,000 31.6 Nil Nil Nil Nil2) Total 3,312,680 100.0 3,312,680,000 100 3,417,058,000 100 Optionholders As at the date Names of Optionholders (Note 5) of this announcement Number of % Options Chuang Shih Ping 33,126,000 31.7Gu Tiefei 5,000,000 4.8Tsang Hing Kwong, Thomas 33,126,000 31.7Zhang Xianlin 33,126,000 31.7 Total 104,378,000 100.0 Note 1: The profit refers to profit after tax and extraordinary items. Note 2: The Independent Scheme Shareholders include the non-profitorganisations who will receive the Shares from Cathay prior to the CourtMeeting, details of which are set out in the paragraph headed "Interest of AirChina and the Concert Parties in CNAC". Note 3: Assuming no Options will be exercised before or on the OptionExercise Date. Note 4: Assuming the Options will be exercised prior to the Record Date. Note 5: All the Optionholders are executive directors of CNAC. The Options were granted on 25 July 2003 and are exercisable during the periodfrom 26 October 2003 to 25 October 2009 at an exercise price of HK$1.14 perShare. INFORMATION ON AIR CHINA Air China is a company incorporated in the PRC on 30 September 2004, whoseshares were listed on the Main Board of the Stock Exchange on 15 December 2004under the stock code 753. Air China's shares were also listed on the LondonStock Exchange in December 2004 by way of a secondary listing. As at the date ofthis announcement, China National Aviation Holding Company, a state-ownedcompany established under the laws of the PRC, directly and indirectly owns65.80% of Air China. Air China is a leading provider of air passenger, air cargoand airline-related services in the PRC. According to Air China, the number of shares in issue of Air China is9,433,210,909 as at the date of this announcement. GENERAL INFORMATION Assuming the Proposals are implemented in full, the consideration ratio pursuantto Rule 14.07 of the Listing Rules in connection with the issue of New Shares byCNAC to Air China pursuant to the Scheme is expected to be 10.9% and thereforewould constitute a discloseable transaction for Air China under Chapter 14 ofthe Listing Rules. Air China will despatch a circular on the possiblediscloseable transaction to its shareholders within 21 days after publication ofthis announcement pursuant to Chapter 14 of the Listing Rules. The Optionholders are all executive directors of CNAC, currently holding inaggregate 104,378,000 Options in CNAC and are therefore deemed to have amaterial interest in the Proposals. As such, an Optionholder who exercises hisor her Options prior to the Record Date would then be required to abstain fromvoting at the Court Meeting in respect of the Option Shares. Assuming all theOptions are exercised in full prior to the Record Date, the issued share capitalof CNAC so enlarged will comprise 3,417,058,000 Shares, of which 104,378,000 areOption Shares, representing approximately 3.05% of the enlarged issued capitalof CNAC. Mr. Zhang Xianlin, an executive director of CNAC, is a supervisor of Air Chinaand therefore a connected person of Air China. As such, if Mr. Zhang Xianlinaccepts the Option Proposal from Air China or becomes a Scheme Shareholder, itwould constitute a connected transaction for Air China under Chapter 14A of theListing Rules. Air China will fully comply with the requirements under Chapter14A of the Listing Rules if and when Mr. Zhang Xianlin accepts the OptionProposal or the Share Proposal. Save as disclosed above, neither the Proposals nor the issue of New Shares byCNAC to Air China would constitute connected transactions for Air China underChapter 14A of the Listing Rules. Overseas Shareholders The making of the Share Proposal to and acceptance of the Share Proposal bypersons not resident in Hong Kong may be subject to the laws of the relevantjurisdictions. Such persons should inform themselves about and observe anyapplicable legal or regulatory requirements. It is the responsibility of anyoverseas Shareholders wishing to accept the Share Proposal to satisfy themselvesas to the full observance of the laws of the relevant jurisdiction in connectiontherewith, including the obtaining of any governmental, exchange control orother consents which may be required, or the compliance with other necessaryformalities and the payment of any issue, transfer or other taxes due in suchjurisdiction. The arrangements for the despatch of the Scheme Document to theShareholders, including the overseas Shareholders, will be set out in a furtherannouncement regarding the despatch of the Scheme Document, to be made by CNAC. AIR CHINA - BACKGROUND TO, REASONS FOR AND BENEFITS OF THE PROPOSALS On 8 June 2006, Air China, Cathay, CNAC, CITIC Pacific Limited and Swire PacificLimited made a joint announcement that they had entered into the RestructuringAgreement in respect of their shareholdings in Dragonair, Cathay and Air China.Concurrent and conditional upon the Restructuring Agreement becoming effective,Air China and Cathay also announced that they had entered into the OperatingAgreement which represents a far reaching agreement to enhance cooperationbetween Air China and Cathay in a number of key operational areas. Air Chinabelieves that the Restructuring Agreement and Operating Agreement represent anextremely attractive package of initiatives that will bring substantial benefitsto the Air China Group as a whole. Implementation of the Restructuring Agreement will involve the followingactions: (i) Air China acquiring a 10.16% shareholding in Cathay from CITIC PacificLimited and Swire Pacific Limited, at HK$13.50 per Cathay share; (ii) Cathay increasing its ownership in Air China from 10% to 20% through thesubscription of new Air China H-shares at HK$3.45 per Air China H-share; (iii) Cathay acquiring the remaining 82.21% shareholding in Dragonair that itdoes not already own from CNAC (43.29%), CITIC Pacific Limited (28.50%) andSwire Pacific Limited (7.71%) and others (2.71%) for a combination of equity(548 million new Cathay shares at HK$13.50 per Cathay share) and cash (HK$822.1million), valuing 100% of the equity of Dragonair at HK$10.0 billion; and (iv) Swire Pacific Limited and CITIC Pacific Limited further reducing theirshareholdings in Cathay to 40.00% and 17.50%, respectively. Execution of the Operating Agreement will include: (i) implementing reciprocal sales representation for passenger services,where Air China will be exclusively responsible for Cathay's passenger sales inMainland China, including those of Dragonair, while Cathay will be exclusivelyresponsible for Air China's passenger sales in Hong Kong, Macau and Taiwan; (ii) the extension of code share arrangements between Hong Kong and MainlandChina such that Air China and Cathay will operate all their passenger services(including those of Dragonair) between Hong Kong and Mainland China under acode-share arrangement; (iii) the operation of all shared routes between Hong Kong and Mainland Chinaas joint venture routes under revenue and cost pooling arrangements; (iv) the creation of a cargo joint venture based in Shanghai which will bemajority controlled by Air China; (v) maintaining Dragonair as a principal airline for at least six years; and (vi) the strengthening of business cooperation in a number of other areas. Implementation of the Restructuring Agreement and the Operating Agreement willbring significant benefits to Air China including the realisation of substantialrevenue and cost synergies by leveraging integration advantages includingimproved load factors and better route management, sharing operating results,creating economies of scale, optimising resource allocation and the transfer ofknow-how between the airlines. Furthermore, Air China believes that the HK$10.0 billion valuation achieved for100% of the equity of Dragonair represents realisation of the full value ofCNAC's 43.29% shareholding in Dragonair, including a fair attribution ofexpected synergies. This valuation represents a price-to-earnings ratio of 33.3times Dragonair's reported earnings of HK$300.4 million for the year ended 31stDecember 2005. In recent years the Chinese aviation industry has experiencedrapid growth and development: the creation of three Chinese airline groups, thecontinuing liberalization of the market to international airlines and theincreasing internationalisation of the Chinese airlines' route networks. In thecontext of these market developments, Air China Directors are of the view thatthe competitive position of Dragonair has deteriorated (especially in the faceof intensive competition on its HK-Mainland routes) and the shareholdingstructure of Dragonair has proved to be inefficient with the result thatDragonair is unable to take full advantage of potential economies of scale andthe management of its business is not optimised. The rationalisation of theshareholding structure of Dragonair will benefit all the companies that arecurrent shareholders of Cathay and Dragonair itself. Upon completion of the Restructuring Agreement, CNAC will own a 7.34%shareholding in Cathay. Air China wishes to rationalise its shareholding inCathay so that Air China directly controls a 17.5% shareholding in Cathay,allowing Air China greater influence over Cathay and to equity account for ahigher percentage of Cathay's financial results. As a result, Air China wishesto privatise CNAC so that CNAC becomes a wholly owned subsidiary of Air China. Announcement of the proposed pre-conditional privatisation of CNAC will alsoenable Air China to fulfill a condition of an irrevocable undertaking to AirChina and CNAC by On Ling Investments Limited (which beneficially ownsapproximately 9.75% of the issued share capital of CNAC) to vote in favour ofthe shareholders' resolutions to be proposed at the Relevant Shareholders'Meeting of CNAC. This irrevocable undertaking is a key component in providingexecution certainty for both the Restructuring Agreement and the OperatingAgreement. CNAC - BACKGROUND TO AND REASONS FOR THE SCHEME The completion of the Restructuring will result in CNAC holding a 7.34% minorityinterest in Cathay, instead of 43.29% interest in Dragonair, thereby effectivelybecoming largely a passive investment holding company. In view of the subsequentmaterial changes in CNAC's business and prospects, it is the view of the CNACDirectors that certain Scheme Shareholders may consider whether they wouldcontinue to hold their Scheme Shares. Considering this factor as well as theabove-mentioned On Ling Investment Limited's conditional irrevocableundertaking, CNAC Directors are of the view that the Proposal would be in theinterest of CNAC and the Shareholders as a whole. For Scheme Shareholders, the Share Proposal Price of HK$2.80 per Scheme Sharerepresents an excellent opportunity to exit from their investment in CNAC andrealise immediate cash proceeds. The Share Proposal Price reflects: (i) a premium of approximately 71.8% over the initial public offering priceof HK$1.63 per Share; (ii) a premium of approximately 65.9% over the average closing price ofapproximately HK$1.69 per Share for the six months up to and including the LastTrading Date; and (iii) an implied price-to-book multiple of 3.0x based on the net asset valueof CNAC (adjusted as for year-end dividends) of HK$3,092.7 million as at 31December 2005. As approximately 68.36% of CNAC is already owned by Air China as at the date ofthis announcement, it is unlikely that Scheme Shareholders will receive anyother offer from a third party to acquire the Shares. In addition, SchemeShareholders should note that no discussions have taken place (or are takingplace) with any third party regarding the disposal of any of the Shares held byAir China and Air China has no intention of selling any of its holding in CNACto any third party. AIR CHINA'S INTENTION IN RELATION TO CNAC Intention regarding CNAC It is the intention of Air China to apply for a withdrawal of the listing of theShares from the Stock Exchange pursuant to Rule 6.05 of the Listing Rules.Scheme Shareholders will be notified by way of press announcement of the exactdates on which the Scheme and the withdrawal of the listing of the Shares fromthe Stock Exchange will become effective. Air China has no current intention tointroduce any major changes to the existing operating and management structureof CNAC, nor does Air China have any current intention to discontinue theemployment of any employee of the CNAC Group as a result of the implementationof the Proposals or the Scheme becoming effective. Lapsing of the Scheme The Scheme will lapse if it does not become effective on or before a date to beset out in the Scheme Document, or such other later date as Air China and CNACmay agree or as the High Court may direct, and the Scheme Shareholders will benotified by way of a press announcement accordingly. The listing of Shares willnot be withdrawn if the Scheme is not approved or lapses. INTEREST OF AIR CHINA AND THE CONCERT PARTIES IN CNAC Cathay, who is deemed to act in concert with Air China in respect of the Scheme,holds approximately 1.95% of the Shares as at the date of this announcement.Cathay has agreed to donate its entire shareholdings in CNAC to a group ofindependent non-profit organisations, for otherwise, certain transactionscontemplated under the Restructuring Agreement and Shareholders Agreement wouldamount to a special deal between Air China and Cathay under Rule 25 of theTakeovers Code. Cathay is currently in the process of selecting the non-profitorganisations and is mindful of the need to make the donations in sufficienttime to enable the non-profit organisations to decide on how to vote on theProposals or whether to accept the Proposals. As such, Cathay will not be aShareholder anymore by the date of the Court Meeting. Merrill Lynch, Pierce, Fenner & Smith Incorporated, which is under the samecontrol as Merrill Lynch, and presumed to be acting in concert with Air China inrespect of the Scheme, sold 2,000 Shares on 1 June 2006 at an average price ofUS$0.27 per Share and holds 14,000 Shares as at the date of this announcement,which will be cancelled pursuant to the Scheme. CICC and Merrill Lynch are exclusive financial advisers to both Air China andCNAC with respect to all aspects of the Restructuring. Save as disclosed in this announcement, or the Restructuring Announcement, noneof Air China and the Concert Parties has any other interest or dealings in CNACduring the Relevant Period. Save as disclosed in this announcement, or the Restructuring Announcement, thereis no arrangement (whether by way of option, indemnity or otherwise) in relationto shares of Air China or the Shares and which might be material to theProposals, nor is there any agreement or arrangement to which Air China is aparty which relates to the circumstances in which it may or may not invoke orseek to invoke a Pre-Condition or a condition to its offer and the consequencesof its doing so. As at the date of this announcement, there is no irrevocable commitment given byany Shareholder to accept the Proposals. Shareholders, Optionholders and/or potential investors in CNAC should be awarethat the making of the Proposals is subject to satisfaction of the Pre-Condition(namely, the completion of the transactions contemplated by the RestructuringAgreement), and the implementation of the Proposals is subject to satisfactionor waiver (as applicable) of the Conditions. In particular, if the Restructuringis not completed, the Proposals will not be made. Even if the Proposals aremade, the Proposals may or may not become effective. Accordingly, Shareholders,Optionholders and/or potential investors in CNAC are advised to exercise cautionwhen dealing in Shares and/or Options. DEFINITIONS In this announcement, the following expressions have the meanings set out belowunless the context requires otherwise. "acting in concert" has the meaning ascribed to it in the Takeovers Code; "Air China" Air China Limited, a company incorporated in the PRC with limited liability whose shares are listed on the Main Board of the Stock Exchange under the stock code 753; "Air China Directors" the directors of Air China; "Air China Group" Air China and its subsidiaries; "Business Day(s)" a day on which banks are opened for business in Hong Kong (excluding Saturdays, Sundays or public holidays in Hong Kong); "Cathay" Cathay Pacific Airways Limited, a company incorporated in Hong Kong with limited liability, whose shares are listed on the Main Board of the Stock Exchange under the stock code 293; "CICC" China International Capital Corporation (Hong Kong) Limited, a licensed corporation for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 9 (asset management) regulated activities under the Securities and Futures Ordinance, being an exclusive financial adviser to Air China in relation to the Proposals; "CNAC" China National Aviation Company Limited, a company incorporated in Hong Kong with limited liability, whose shares are listed on the Main Board of the Stock Exchange under the stock code 1110; "CNAC Board" the board of CNAC Directors; "CNAC Directors" the directors of CNAC; "CNAC Group" CNAC and its subsidiaries; "Companies Ordinance" the Companies Ordinance (Chapter 32 of the Laws of Hong Kong); "Concert Parties" persons who are acting in concert with Air China; "Conditions" the conditions of the Proposals, as set out under the paragraph headed "Conditions of the Proposals" of this announcement; "Court Meeting" a meeting of the Independent Scheme Shareholders to be convened at the direction of the High Court at which the Scheme will be voted upon; "Dragonair" Hong Kong Dragon Airlines Limited, a private company incorporated in Hong Kong; "Effective Date" the date on which the Scheme, if approved, becomes effective in accordance with its terms, being the date on which an official copy of the order of the High Court sanctioning the Scheme together with the minutes containing the particulars required by Section 61 of the Companies Ordinance are registered by the Registrar of Companies in Hong Kong; "Extraordinary the extraordinary general meeting of CNAC to be held General Meeting" to consider and approve, among other matters, the capital reduction arising as a result of the Scheme, or any adjournment thereof; "High Court" the High Court of Hong Kong; "HK$" Hong Kong dollars, the lawful currency of Hong Kong; "Hong Kong" the Hong Kong Special Administrative Region of the PRC; "Independent Scheme Scheme Shareholders other than Concert Parties and, Shareholders" in respect of the Option Shares, the Optionholders; "Independent Board the independent board committee, comprising all Committee" non-executive directors of CNAC, other than Mr. Hu Hung Lick, Henry who is also an independent non-executive director of Air China, appointed to advise Independent Scheme Shareholders and Optionholders in respect of the Share Proposal and the Option Proposal, respectively; "Last Trading Date" 2 June 2006, being the last day on which Shares were traded prior to the publication of the Restructuring Announcement; "Listing Rules" the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited; "Merrill Lynch" Merrill Lynch (Asia Pacific) Limited, a licensed corporation for type 1 (dealing in securities), type 4 (advising on securities), type 6 (advising on corporate finance) and type 7 (providing automated trading services) regulated activities under the Securities and Futures Ordinance, being an exclusive financial adviser to Air China in relation to the Proposals; "New Share" new Share(s) to be issued to Air China or its nominees, credited as fully paid, pursuant to the Share Proposal; "Operating Agreement" the agreement entered into by Air China and Cathay on 8 June 2006, details of which are set out in the joint announcement made by Air China and Cathay on 8 June 2006; "Options" the share options granted pursuant to the Share Option Scheme; "Optionholders" the holders of one or more Options, and as at the date of this announcement, means Chuang Shih Ping, Zhang Xianlin, Tsang Hing Kwong, Thomas and Gu Tiefei, who altogether hold 104,378,000 Options (or, if Air China so elects prior to the Scheme lapsing or becoming ineffective, the offer by Air China to acquire all of the Outstanding Options not owned by Air China at a price equl to the Option Proposal Price); "Option Exercise the date which is fourteen days after the Effective Date" Date; "Option Proposal" the proposal to Optionholders for cancellation of all Outstanding Options (or, if Air China so elects prior to the despatch of the Scheme Document, a general offer by Air China to acquire all of the Outstanding Options not owned by Air China at a price equal to the Option Proposal Price); "Option Proposal HK$1.66 per Outstanding Option pursuant to the OptionPrice" Proposal; "Option Shares" Shares that are subscribed for in exercise of the Options pursuant to the Share Option Scheme; "Outstanding Options" Options not exercised as at the Option Exercise Date; "Pre-Condition" the Pre-Condition to making the Proposals, as set out under the paragraph headed "The Pre-Condition to making the Proposals" of this announcement; "Proposals" the Share Proposal and the Option Proposal; "PRC" the People's Republic of China, excluding, for the purpose of this announcement, Hong Kong, Macau and Taiwan; "Pre-Conditions" the Pre-Conditions to making the Proposals, as set out under the paragraph headed "The Pre-Conditions to making the Proposals" of this announcement; "Proposals" the Share Proposal and the Option Proposal; "Record Date" two Business Days prior to the Court Meeting; "Relevant Period" the period from 8 December 2005 to the date of this announcement; "Relevant the shareholders' meetings to be convened by Air Shareholders' China, CNAC, Cathay, CITIC Pacific Limited and Swire Meetings" Pacific Limited to approve the Restructuring; "Restructuring" the restructuring referred to in the Restructuring Agreement; "Restructuring the restructuring agreement dated 8 June 2006 enteredAgreement" into by Swire Pacific Limited, CITIC Pacific Limited, CNAC, Air China and Cathay, details of which are set out in the Restructuring Announcement; "Restructuring the joint announcement dated 8 June 2006 published byAnnouncement" Air China, CNAC, Cathay, CITIC Pacific Limited and Swire Pacific Limited; "Scheme" a scheme of arrangement under Section 166 of the Companies Ordinance; "Scheme Document" the document to be issued to all Shareholders and Optionholders containing, among other things, further details of the Proposals and the Scheme, the recommendation of the Independent Board Committee in respect of the Proposals, the letter of advice from the independent financial adviser to the Independent Board Committee, an explanatory statement as required under the Companies Ordinance, the expected timetable, and the notices convening the Court Meeting and the Extraordinary General Meeting; "Scheme Shareholders" Shareholders except Air China, but including the Shares held by Concert Parties and Option Shares; "Scheme Shares" the Share(s) held by Scheme Shareholders; "SFC" the Securities and Futures Commission of Hong Kong; "Shares" ordinary shares of HK$0.10 each in the issued share capital of CNAC; "Share Option Scheme" the share option scheme adopted by CNAC on 29 May 2002, the major terms of which are set out in the audited annual report of CNAC for the year ended 31 December 2005; "Share Proposal" the proposal to Scheme Shareholders for the cancellation of all Scheme Shares pursuant to the Scheme (or, if Air China so elects prior to the despatch of the Scheme Document, a general offer by Air China to acquire all of the Shares not owned by Air China at a price equal to the Share Proposal Price); "Share Proposal HK$2.80 per Scheme Share pursuant to the Share Price" Proposal; "Shareholders" registered holders for the time being of Shares; "Shareholders the shareholders agreement referred to in the Agreement" Restructuring Announcement; "Stock Exchange" The Stock Exchange of Hong Kong Limited; "subsidiaries" has the meaning ascribed to it in Section 2 of the Companies Ordinance; "Takeovers Code" The Hong Kong Code on Takeovers and Mergers; "Voting Shares" Scheme Shares other than the Option Shares and those held by Concert Parties. By order of the Board By order of the Board Air China Limited China National Aviation Company Limited Li Jiaxiang Kong Dong Chairman Chairman Hong Kong, 21 June 2006 The directors of Air China jointly and severally accept full responsibility forthe accuracy of the information contained in this announcement (other than thatrelating to the CNAC Group) and confirm, having made all reasonable enquires,that to the best of their knowledge, opinions expressed in this announcement(other than those expressed by CNAC) have been arrived at after due and carefulconsideration and there are no other facts (other than those relating to theCNAC Group) not contained in this announcement, the omission of which would makeany statements in this announcement misleading. As at the date of this announcement, the board of directors of Air Chinacomprises Li Jiaxiang, Kong Dong, Wang Shixiang, Yao Weiting, Christopher Prattas non-executive directors, Ma Xulun, Cai Jianjiang, Fan Cheng as executivedirectors, and Hu Hung Lick, Henry, Wu Zhipan and Zhang Ke as independentnon-executive directors. The directors of CNAC jointly and severally accept full responsibility for theaccuracy of the information contained in this announcement (other than thatrelating to the Air China Group) and confirm, having made all reasonableenquires, that to the best of their knowledge, opinions expressed in thisannouncement (other than those expressed by Air China) have been arrived atafter due and careful consideration and there are no other facts (other thanthose relating to the Air China Group) not contained in this announcement, theomission of which would make any statements in this announcement misleading. As at the date of this announcement, the board of directors of CNAC comprisesKong Dong, Chuang Shih Ping, Zhang Xianlin, Zhao Xiaohang, Tsang Hing Kwong,Thomas, Gu Tiefei as executive directors, Lok Kung Nam, Hu Hung Lick, Henry, HoTsu Kwok, Charles, Li Kwok Heem, John, Chan Ching Har, Eliza as independentnon-executive directors. This information is provided by RNS The company news service from the London Stock Exchange