Sinopec and ENN launch hostile bid for China Gas

Natural gas distributor ENN Energy and state-owned China Petroleum & Chemical Corp (Sinopec) have launched a rare Hong Kong hostile takeover in a bid to win control of China Gas, another distributor.

It is the first time a Chinese state-owned enterprise has backed an unsolicited offer in the city, putting China Gas in a difficult spot as it continues to struggle in the wake of its chairman’s arrest last December on suspicion of embezzlement. He remains under house arrest in Shezhen.

According to a statement made to the stock exchange in Hong Kong yesterday, the two bidders are offering to pay HK$3.50 a share in cash for China Gas’s entire outstanding share capital, at a total cost of about HK$15.7 billion. That represents a 40% premium to the 30-day average price and a 25% premium to the price last Wednesday, when trading in the company’s shares was suspended pending the outcome of an initial approach by ENN and Sinopec.

The valuation may seem fair based on the stock’s recent track record, but the board of China Gas clearly does not agree. The three companies started discussions last week, according to a person close to the deal, but the talks failed to get anywhere and on Monday China Gas asked for trading in its shares to resume, which prompted ENN and Sinopec to take their offer hostile.

The bid is opportunistic, inspired by obvious discontent among some China Gas shareholders at the way the company has handled the scandal among its senior management, with the bidders pitching themselves as a more competent team to take the company forward.

That may be so, but valuation will be key, as ever. China Gas last raised new equity capital, before the scandal, at HK$4.31 through a HK$3 billion offering in October 2010 and the company’s owners would likely prefer an offer closer to that level.

However, the involvement of a Chinese government-backed enterprise means that China Gas is unlikely to find many friends willing to spring to its defence. The source said last night that ENN and Sinopec hope to push the deal forward on a friendly basis, and that China Gas may agree to that as its options run out.

After all, there is only likely to be one winner in a hostile battle with Sinopec, whose chairman, Fu Chengyu, has some demons to exorcise on that front anyway — he was running CNOOC back in 2005 when it failed in its unsolicited bid for Unocal in the US. He is not about to repeat that mistake.

Indeed, partnering with ENN is a smart move. If the offer is successful, ENN will own 55% and Sinopec 45% — and it is hard to argue that ENN is anything other than a strong bidder. Compared to China Gas, it is growing faster, is more profitable and enjoys higher margins. Combined with Sinopec’s network across China, it makes for a powerful proposition.

Citi is acting as lead financial adviser to ENN and Sinopec.

The hostile bid comes just one day after Sinopec agreed to increase its stake in the Australia Pacific LNG project to 25%, up from 15%.