Sinopec, ENN Drop $2.2 Billion Offer for China Gas

Sinopec Corp (0386.HK) dropped its $2.2 billion offer with ENN Energy Holdings (2688.HK) for China Gas (0384.HK) due to regulatory hurdles, a defeat for acquisitive Chairman Fu Chengyu in what would have been the first unsolicited takeover in Hong Kong.

Instead, Sinopec entered into a strategic agreement with China Gas Holdings Ltd to jointly develop natural gas and liquefied petroleum gas (LPG) in China. The cooperation agreement seems like a face-saving move for Asia's largest refiner, industry watchers said.

Unsolicited deals are rare in China, and one from a state-run enterprise is even more difficult to engineer. For Sinopec's Fu, being turned down by the target company after a 10-month courtship was embarrassing as it raised questions whether the original offer in December was made hastily, observers said.

"Chairman Fu has ended up in a reasonable position. He wanted access to downstream, he has got it. He hasn't lost face, he has ended as a friend of China Gas," one person with direct knowledge of the situation said.

The Sinopec-ENN consortium abandoned the offer after failing to secure regulatory approval for the plan, it said in a separate statement. The filing gave no details.

Opposition from China Gas's management to the bid also played a part in the dropping of the bid.

"The reaction from China Gas' board was not anticipated by us," Wang Dongzhi, executive director and vice president of ENN, told Reuters by phone. "Given the difficulty of obtaining the trade ministry's approval and the challenge of integrating China Gas' portfolios under a hostile deal, we chose to withdraw the offer."

Industry sources linked the trade ministry's reluctance to approve the offer to Beijing's policy in May to encourage private investment across industries, with a special focus on heavily state-controlled electricity, oil and natural gas sectors.

STIFF OPPOSITION

Sinopec/ENN underestimated China Gas's ability to stand up and fight, observers said. Sinopec, which already owns 5 percent of China Gas, could have averted some of the complications by buying China Gas stake in the open market instead of negotiating with some of the unhappy shareholders, they said.

In December last year, Sinopec (600028.SS) (SNP.N) and ENN, advised by Citigroup (C.N), made a conditional cash offer of HK$3.50 for China Gas. The piped-gas distributor rejected the offer, saying it failed to reflect the true value of the Hong Kong-listed company.

Shares in China Gas have since traded consistently above the offer price as some key shareholders, including Beijing Enterprises Group Co Ltd, jostled to raise their stakes in the company, which operates in more than 150 Chinese cities.

China Gas shares ended at HK$4.3 on Friday, a 23 percent premium to the initial offer price. The shares were suspended from trading on Monday pending the announcement and will resume trading on Tuesday.

The pre-conditions set in the Sinopec-ENN proposal included winning the necessary approvals from Chinese regulatory authorities, and China Gas allowing Sinopec and ENN to conduct due diligence.

In a filing with the Hong Kong stock exchange, China Gas said it planned to set up a joint venture with Sinopec to distribute LPG produced by Sinopec and that the state giant would use it as platform and partner to develop city gas projects.

The cooperation will allow China Gas "to combine its large city gas network with the abundant natural gas and LPG resources of Sinopec in further enhancing and expanding the distribution network of its natural gas and LPG businesses", China Gas said.

Eric Leung, deputy managing director of China Gas, described the cooperation with Sinopec as a "milestone" for the company and China Gas was pleased to see Sinopec and ENN drop the offer.

RARE OFFER

About 51 percent of China Gas is held by state-controlled utility Beijing Enterprises Group (BJEG) and two other investors, one of them a venture set up by London-listed Fortune Oil (FOOI.L) and China Gas' managing director Liu Minghui, and the other a unit of South Korea's SK Group (003600.KS).

The long-drawn takeover battle had been further complicated by the return of Liu in July to the company that he co-founded about 10 years ago. Liu rejoined China Gas after being cleared of embezzlement allegations in mainland China.

Liu, managing director of China Gas between 2002 and early 2011, quit after being detained by Chinese police in December 2010. That triggered a sharp decline in China Gas shares and encouraged Sinopec/ENN to make their move.

Weak share prices of China Gas caught the eye of Fu, who was also attracted to China's rapidly growing gas consumption and a fragmented shareholding structure of the company, sources say.

But the China Gas battle became complicated after BJEG, parent of Beijing Enterprises Holding Ltd (0392.HK), started buying shares in the target company in May, in a rare fight for the same asset between two state-controlled Chinese companies.

BJEG, controlled by the Beijing city government and holding about 20 percent of the firm, has kept its cards close to its chest, declining to reveal whether it would launch a takeover offer for China Gas.