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Sinopec, ENN Extend Deadline to Buy China Gas to July 6

China Petroleum and Chemical Corp. and ENN Energy Holdings Ltd., joint bidders for China Gas Holdings Ltd., extended the deadline for the acquisition to July 6 as they wait for regulatory approvals.

ENN Energy also postponed distributing a circular to shareholders on the planned deal to no later than May 31, the bidders said in a Hong Kong stock exchange filing yesterday. ENN said on March 19 it would dispatch a circular on the HK$15.3 billion ($2 billion) bid by yesterday.

China Petroleum, Asia’s biggest refiner, and ENN have extended deadlines twice since offering to acquire China Gas for HK$3.50 a share in cash in December. China Gas, a fuel supplier in 20 mainland provinces, rejected the offer, saying it’s opportunistic and fails to reflect the company’s value, and has declined invitations by the bidders for talks.

“This war of patience is going to drag on, for there’s no way China Gas will get engaged in talks unless the bidders significantly raise the offer price,” Wang Pei, a Hong Kong-based analyst at Bank of China International Ltd., said before the announcement. “One party has to make compromises to get the talks started.”

China Gas rose 0.5 percent to HK$3.86 at the close in Hong Kong yesterday. The stock has advanced 38 percent since Dec. 12, the day before the offer was announced. ENN gained 0.7 percent and Sinopec climbed 3.7 percent in the same period.

Fair Value

The offer reflects a fair market valuation of China Gas, ENN President Wang Dongzhi said in Hong Kong on March 28. The board and president of China Gas were contacted before the bid was proposed as well as in February and March, and China Gas officials declined invitations to talks, ENN Chief Financial Officer Wilson Cheng said at the time.

China Petroleum said the offer is “fair” and reflects the company’s value. A price higher than the market valuation can’t be paid, Fu Chengyu, chairman of Sinopec, as China Petroleum is known, said on March 26.

The bidders previously extended the deadline to May 15 from March 31, citing extra time needed to acquire regulatory approvals from the Chinese government. That followed a delay in February to circulate the notice.

The delays are “extremely frustrating for China Gas, for our staff and for our shareholders,” President Eric Leung said on March 20. China Gas objects “in the strongest terms” to the extension, Leung said at the time.

Access to Customers

Sinopec and ENN sent an open letter to employees at the takeover target to assure them they would benefit from the proposed acquisition. The buyers “do not intend to make any material changes” to employment at China Gas, according to an exchange filing on April 19.

Buying China Gas, whose shareholders include SK Holdings Co. and Fortune Oil Plc, would give Sinopec and ENN access to its 6.6 million residential customers and 42,000 industrial and commercial users in the world’s second-biggest economy.

ENN, the fourth-biggest Hong Kong-listed gas supplier by sales, plans to fund 55 percent of the proposed acquisition as it plans to expand its distribution network, while Sinopec will pay for the rest.

Moody’s Investors Services and Standard & Poor’s put ENN’s credit ratings on review for a possible downgrade, saying the proposed acquisition may drain the company’s cash and increase its debt burden.

Financial Resources

ENN may not have enough financial resources to further raise the offer price, BOC’s Wang said. To make the deal move forward, ENN may have to give up its position of the majority shareholder in the proposed deal, Wang said.

The company had cash and cash equivalents of 3.35 billion yuan and a restricted bank deposit of 2.52 billion yuan as escrow for the offer as of Dec. 31, according to its annual report released on March 28. Total debt was 10.67 billion yuan as of the end of last year, ENN said.

“Sinopec may have to play a leading role if they want to raise the offer to an acceptable level to China Gas,” Wang said. “ENN simply doesn’t have the financial resources to support a higher offer under the current shareholding structure.”

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