China Resources Power Shareholders Reject Unit Integration

China Resources Power Holdings Co. (836), the electricity generator accused of deliberately overpaying for coal assets in 2010, scrapped a plan to combine with a sister company after shareholders rejected the proposal.

Sixty-four percent of the company’s minority shareholders voted against the integration with China Resources Gas Group Ltd. (1193), China Resources Power said in a statement to the Hong Kong stock exchange today. The deal had been expected to fail, with the gas unit trading 14 percent higher than the value of the offer shortly after the shareholder vote ended in Hong Kong today, indicating investors considered the bid too low.

“It should be next to impossible for the power unit to pitch another merger with the gas unit, as shareholders have already made their attitude crystal clear,” Shi Yan, an analyst at UOB-Kay Hian Ltd. in Shanghai, said by phone. “The power unit has to find a way to disconnect itself from all the negatives from the Shanxi coal mine purchase and convince investors to focus on its money-making power generation business.”

Follows Controversy

The deal’s failure follows a controversy last week over the company’s 2010 purchase of stakes in three coal mines in Shanxi province. All five of the parent company’s units traded in Hong Kong sank after allegations against it and Song Lin, the parent’s chairman, were posted by the official Xinhua News Agency to its website on July 17. The parent is now being audited by the government, Xinhua reported July 19. Xi Jinping, who became China’s president in March, has pledged to investigate and clean up graft that’s threatening to undermine the economy and the government’s grip on power.

The deal had valued China Resources Gas at HK$24.64 a share, or HK$54.8 billion ($7.1 billion), including debt, a 13 percent premium to its closing price of HK$21.85 on May 9. China Resources Power shares had since tumbled from HK$25.40 on May 9 to HK$16.86, valuing the gas unit at HK$38.56 billion at the July 19 close of trade.

China Resources Power rose 5.2 percent to HK$17.74 a share in Hong Kong today, while China Resources Gas was up 1.9 percent at HK$19.54, leaving the gas unit 14 percent above the value of the offer.

SASAC Audit

China Resources Holdings Co., the state-run parent, is being audited by the State-owned Assets Supervision and Administration Commission, which has started reviewing company accounts, Xinhua reported, citing an unidentified official at the agency. SASAC will severely punish any misconduct, according to the report.

“The SASAC investigation just provided one more reason for independent shareholders to kill the deal,” said UOB’s Shi. “The key factor preventing the vote from getting passed was failure to explain why shareholders need this merger at all.”

China Resources Holdings employs more than 400,000 people and controls businesses spanning power generation, cement production, real estate and finance. Unit China Resources Enterprise produces the country’s best-selling brand of beer with SABMiller Plc. (SAB) In 2012, China Resources Holdings had HK$41.2 billion of profit on HK$404.6 billion of sales, according to its website.

Xinhua Letter

In his letter posted to Xinhua’s website, Xinhua reporter Wang Wenzhi alleged that Song and other executives deliberately overpaid for the mine assets. China Resources Power bought an 80 percent stake in the mines for 7.9 billion yuan, while another company had offered to pay 5.2 billion yuan for the entire asset a few months earlier, according to the letter, which was addressed to the Communist Party’s Central Commission for Discipline Inspection.

A group of minority investors said July 18 they had filed a lawsuit in Hong Kong making similar allegations and demanding the company forfeit the purchase. They have no connection with Xinhua’s Wang, Li Su, founder of Hejun Vanguard Group, which is representing the investors, said at a briefing.

Datong Coal Mine Group is the company that planned to buy the same assets for 5.2 billion yuan in 2010 before walking away from the deal, according to the letter posted by Wang.

Datong Coal has no connection with China Resources Power’s 2010 purchase and won’t comment on anything concerning the deal, a media official who only gave his surname as Liu, said by phone on July 19 from the company’s headquarter in Datong, Shanxi.

Three calls to Shanxi Jinye Coal Coking Group Co., the seller of the assets, went unanswered on July 19.

To contact the reporter on this story: Aibing Guo in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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