China Petroleum & Chemical Corp., Asia’s biggest refiner, ditched a $2 billion hostile bid for China Gas Holdings Ltd. after a 10-month tussle, opting to form a partnership to tap local demand for natural gas.
Sinopec, as China Petroleum is known, will share resources with China Gas to distribute liquefied petroleum gas, compressed natural gas and liquefied natural gas, China Gas said in a exchange filing. Sinopec may buy new China Gas shares, China Gas Joint Managing Director Eric Leung said in an interview.
Sinopec, China’s second-biggest natural gas producer, initiated the bid with ENN Energy Holdings Ltd. in December, seeking access to more than 7 million residential users and 40,000 industrial and commercial customers of China Gas in the world’s second-biggest economy. China Gas, which wants to expand its businesses into the more lucrative urban markets, requires land and retail licenses to implement its plans.
“Although the acquisition attempt failed, Sinopec got something out of it,” said Laban Yu, head of Asia oil & gas equity research at Jefferies Hong Kong Ltd. “The partnership will serve Sinopec well in the long term as its goal for the takeover was to gain access to China Gas’ retail business.”
China Gas shares, which were halted yesterday pending a “price sensitive” announcement, fell 4.2 percent to HK$4.12 at the close in Hong Kong today, the most since Nov. 29. ENN gained 2.8 percent to HK$32.75, while Sinopec fell 0.9 percent to HK$7.82.
Sinopec and ENN won’t pursue the takeover after failing to acquire regulatory approvals, the bidders said in a joint statement yesterday.
China Gas had “good communications” with Sinopec, which owns less than 5 percent of China Gas, Leung said yesterday, without specifying when Sinopec and China Gas shifted to pursuing partnership talks. Sinopec will guarantee natural gas supplies to the city pipelines run by China Gas, he said.
“There’s still a shortage of natural gas in many areas in China,” he said. “Also, Sinopec’s 30,000 gasoline stations across the country and its retail licenses will help us quickly expand our retail business on liquefied fuels.”
Sinopec and China Gas will form ventures to sell LPG produced by Sinopec’s refineries and introduce LNG and LPG counters at Sinopec’s gas stations. The holding structure of the ventures has yet to be worked out, he said.
China Gas shares had jumped to more than HK$4 after Sinopec and ENN had announced their bid in December. The companies refused to raise the price even after China Gas shareholders paid as much as 17 percent more than their offer to add to their holdings this year.
Beijing Enterprises Group, parent of Hong Kong-listed Beijing Enterprises Holdings Ltd., increased its stake to 20.3 percent as of July 11. A group led by Fortune Oil Plc controls 16.01 percent as of July 31 and Korea’s SK Holdings owns 15.33 percent of China Gas shares, according to company filings.
The three largest shareholders, who together control more than 50 percent of China Gas, had said the offer was too low and doesn’t reflect the company’s value.
“It comes as no surprise the bidders walked away from the deal, especially after the major shareholders repeatedly said the offer price was too low,” said Wu Fei, a Hong Kong-based analyst at Bocom International.
Abandoning the bid for China Gas may not be a negative move for ENN, the fourth-biggest Hong Kong-listed gas supplier by sales, Wu said. ENN shares had dropped more than 10 percent in the two days following the bid and the company’s credit rating was put on review for a possible downgrade by Moody’s Investors Service and Standard & Poor’s, which said the purchase may drain ENN’s cash and increase its debt.
“Walking away from the deal could help ENN focus more on expanding its existing network, which has been very profitable,” Wu said.
An outside ENN spokeswoman refused to comment on the development, referring all questions to the stock exchange statement.