Bloomberg News

Sinopec, ENN Energy Offer $2 Billion in Cash for China Gas

December 13, 2011

(Updates share prices in fifth paragraph.)

Dec. 13 (Bloomberg) -- China Petroleum & Chemical Corp., known as Sinopec, and ENN Energy Holdings Ltd. offered HK$15.3 billion ($2 billion) in cash for China Gas Holdings Ltd. to gain control of a fuel-distribution network covering 20 provinces.

ENN and Sinopec, Asia’s biggest refiner, bid HK$3.50 a share for the Hong Kong-based company that supplies piped gas to the mainland, the companies said today in a statement. The offer is 25 percent more than China Gas’s last close.

Buying China Gas will give the companies access to its 6.6 million residential customers and 41,981 industrial and commercial users in the world’s second-biggest economy. China Gas last month reported a fourfold gain in first-half profit and said it had been approached by an investor after the arrest of two senior executives caused the stock to slump this year.

“China Gas’s stock has been undervalued for a long while, so both investors are really getting on board at the right time,” said Shi Yan, a Shanghai-based analyst at UOB-Kay Hian Ltd. “ENN has always wanted to expand its utility network and Sinopec has been looking to diversify its business from over- reliance on refining.”

China Gas closed up 20 percent at HK$3.37 in Hong Kong. ENN declined 2.6 percent to HK$26.40, after sliding as much as 7.8 percent. Sinopec dropped 0.4 percent to HK$8.03. The benchmark Hang Seng Index declined 0.7 percent.

ENN, the fourth-largest Hong Kong-listed gas supplier, will fund 55 percent of the deal, while Sinopec will cover the rest of the financing, the statement said.

Deal Valuation

The offer is priced at 11.29 times earnings before interest, tax, depreciation and amortization, compared with 10.95 times in 10 comparable deals, according to data compiled by Bloomberg.

Today’s bid follows China Petrochemical Corp’s agreement yesterday to invest an estimated $1 billion to increase its stake in an Australian liquefied natural gas project led by ConocoPhillips and Origin Energy Ltd. It takes the number of energy deals by Chinese and Hong Kong-based companies to 279 this year worth $43 billion, compared with last year’s record 367 deals valued at $59.6 billion, according to data compiled by Bloomberg.

China Gas said Nov. 14 an independent investor was keen to buy a “substantial stake.” The distributor also runs 112 compressed natural gas filling stations and 44 liquefied petroleum gas distribution projects.

Citigroup Inc. was named adviser to the bidders, according to the statement. The bank is providing a so-called bridge loan to ENN, according to a joint statement released today in Hong Kong by Sinopec and ENN. A bridge loan is a short-term loan that is usually replaced by longer-term financing.

Citigroup may sell part of the loan it provided Sinopec and ENN for the bid, two people familiar with the matter said. A decision on whether to syndicate the facility hasn’t yet been made, one of the people said, asking not to be identified because the details are private.

Negative Watch

“The acquisition increases ENN’s net indebtedness, while providing limited incremental cash flows to ENN in the short-to- medium term,” Fitch Ratings (Beijing) Ltd. said in a statement, adding that it may result in a one-notch cut to ENN’s rating to BBB minus.

Moody’s Investors Service placed ENN on review for possible downgrade today and Standard & Poor’s Ratings Services placed ENN on credit watch with negative implications.

ENN had cash and cash equivalents of 5.7 billion yuan ($896 million) as of June 30 and debt of 9.8 billion yuan, the company said Sept. 2. ENN plans to sell 1.3 billion yuan of short-term bonds to pay bank loans and raise working capital, it said in a statement on Dec. 9 on Chinamoney.com.cn, a website of the China Foreign Exchange Trade System.

ENN will issue the one-year bonds on Dec. 16, and half of the proceeds will be used to pay loans and the rest for fuel purchases, the statement said.

Embezzlement

Two China Gas officials were detained by Shenzhen police last December for suspected embezzlement of assets. China Gas removed the men from its board and dismissed one of them.

On Nov. 11, Apple Daily said the former executives were out on bail. China Gas said Nov. 14 it had received no confirmation on the reported release from mainland judicial authorities, and had instructed its lawyers to gather more information on the matter.

The company’s net income increased to HK$374 million in the six months ended Sept. 30, from HK$93 million a year earlier, as demand from residential and industrial users rose, China Gas said Nov. 29.

China Gas shares have pared declines since falling to a low of HK$1.63 on Oct. 4. They closed at HK$2.80 on Dec. 6.

ENN, based in Hebei province in northern China, operates 100 city piped gas projects on the mainland, supplying 6.1 million households and 21,146 industrial and commercial users, according to its interim report released Sept. 2.

China’s natural-gas consumption is forecast to increase as the government boosts the fuel’s share to 10 percent of total energy demand by 2020 from 4 percent in 2010.

--With assistance from Winnie Zhu in Shanghai, James Paton in Sydney, Paul Gordon and Wendy Mock in Hong Kong and Joshua Fellman in New York. Editors: Andrew Hobbs, Indranil Ghosh

To contact the reporter on this story: Guo Aibing in Hong Kong at aguo10@bloomberg.net

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net


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