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China to Push Merger Talks to Form $241 Billion Energy Giant: Sources

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  • Combined coal, power company would own assets of $241 billion
  • Possible merger would create China’s biggest power generator

China’s state-owned enterprise regulator has asked coal mining giant Shenhua Group Corp. and power generator China Datang Corp. to discuss a possible merger, according to people with knowledge of the situation.

The talks are at an early stage and there’s no guarantee of a deal, said the people, who asked not to be identified as the information isn’t public. Datang International Power Generation Co., Datang’s Hong Kong-listed unit, said Thursday that the parent company hasn’t received any related news and that it has no information to disclose. Its shares closed 8 percent higher, the biggest gain in two years, at HK$2.29.

A merger would combine China’s biggest coal producer with one of its largest power generators to create a utility giant with about 1.66 trillion yuan ($241 billion) of assets. China Shenhua Energy Co., Shenhua’s Hong Kong-listed company, lost 1.7 percent to HK$18.20. The city’s benchmark Hang Seng Index dropped 0.4 percent.

“It’s definitely good news for Datang, as it’s one of China’s big power generators, while Shenhua is one of the world’s best coal companies in terms of both production and cost control,” said Laban Yu, head of Asia oil and gas equities at Jefferies Group LLC in Hong Kong. “If the merger happens, Datang will basically take out coal price risks from operations, which would be a huge advantage.”

Strategic Fit

The State-owned Assets Supervision and Administration Commission encouraged the discussions as the two businesses complement each other and a merger would be in line with China’s supply-side reform policies, the people said. Sasac didn’t respond to a fax seeking comment. A spokesman for Shenhua didn’t respond to requests for comment.

A merger would build on President Xi Jinping’s efforts to cut the nation’s industrial overcapacity, accelerate the drive to overhaul its bloated state-owned sector and reduce its reliance on coal. China will speed up mergers and acquisitions of state-owned firms in coal, power, machinery and steel this year, Sasac vice-chairman Zhang Xiwu said in Beijing earlier this month.

“If successful, this may be a good model for China’s coal and power industry reforms as a company with strong coal and coal-fired power assets could maintain reasonable profits in almost all circumstances,” said Lin Boqiang, an adviser to the country’s National Energy Administration and director of Xiamen University’s China Center for Energy Economics Research.

Coal, Power, Rail

Shenhua’s assets totaled 931.4 billion yuan in 2015, with Datang’s totaling 729.5 billion yuan, according to their websites. Last year, Shenhua submitted a proposal to Sasac about merging with state-owned China General Nuclear Power Corp., Bloomberg reported in July. Both companies said they weren’t in merger talks.

Other than coal, Beijing-based Shenhua owns power plants and railways. Datang, also based in Beijing, generates electricity in 31 provinces and municipalities in China, as well as in Myanmar, Cambodia and Laos.

Listed unit China Shenhua Energy this month posted its first profit growth in four years and issued a special dividend that sent share prices up by more than 20 percent. Datang International Power Generation swung to a 2.75 billion yuan loss for 2016 on higher coal costs.

Shenhua Group’s power-generation capacity totaled 78.5 gigawatts in 2015, while China Datang had 127.2 gigawatts, according to their websites. A combined company would top power behemoth China Huaneng Group’s 160.6 gigawatts. The country had 1.5 terawatts of power capacity in 2015.

— With assistance by Aibing Guo, and Heng Xie

(Updates with closing share prices in the second and third paragraphs.)
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