China Resources Utility Units Combine in Shift From Coal

State-owned China Resources (Holdings) Co. plans to combine two of its Hong Kong-traded subsidiaries amid a shift from coal-fired power, sending shares in its electricity generation unit down as much as 11 percent.

China Resources Power Holdings Co., an electricity generator, will offer HK$24.64 a share for all the shares of China Resources Gas Group Ltd., a natural gas distributor, both companies said in a joint statement to Hong Kong’s stock exchange today. There will be no cash alternative for the deal, which values China Resources Gas at HK$54.8 billion ($7.1 billion). The offer represents a 13 percent premium to China Resources Gas’s closing share price May 3, its last day of trade before both stocks were suspended.

The integration of the two units comes amid pressure in China to reduce pollution by shifting to cleaner fuels such as natural gas. Shares of China Resources Power, which largely uses coal for electricity generation, fell the most since November 2008 percent in morning trading in Hong Kong.

“The share movement has spoken for itself -- China Resources Power investors were not happy about the premium being proposed,” said Judith Chen, Shanghai-based utility analyst at KGI Asia Ltd. “Over time, investors would have the chance to look at the long-term benefit from the merger, which is to provide a bigger platform for both companies that otherwise they may not able to create alone.”

Higher Valuation

Natural gas distributors enjoy a higher valuation than electricity companies in China, Chen said.

Shares of China Resources Gas declined 2.8 percent to $HK$21.25 as of 11:09 a.m. China Resources Power was down 10 percent at HK22.85. The city’s benchmark Hang Seng Index dropped 0.1 percent.

China Resources Power will change its name to China Resources Energy Holdings Ltd. upon completion of the deal and China Resources Gas will be de-listed, according to the statement.

China Resources Power’s market size is HK$108.9 billion, while China Resources Gas is valued at HK$47.1 billion, according to data compiled by Bloomberg. Their parent controls 11 listed companies in China, employs 400,000 workers, and made a profit of HK$41.1 billion on revenue of HK$405.7 billion in 2012, according to its website.

Song Lin, Chairman of the parent, said the merger could be completed between July and August, according to a report from Hong Kong’s Sing Tao Daily on May 9.