Heating up

Pumped up shares

Beijing Enterprises is not a company that’s frequently in the news. In fact, the last time it hogged the headlines was when it listed in Hong Kong in 1997. Back then it set off a frenzy, with Hongkongers queueing up to get its prospectus and purchase its stock. The retail tranche was 1,276 times oversubscribed, setting a new local record at the time.

Its parent – Beijing Enterprises Group – has now decided to grab some headlines of its own. In a bold move it has tripled its stake in China Gas Holdings, a company currently subject to a takeover bid from Sinopec, the state oil giant, and ENN, a gas pipeline operator.

This creates a genuine problem for Sinopec and its bid partner, not least as the shares were sold at HK$4.10, significantly above the HK$3.50 per share that they offered for China Gas last December.

News of the purchase stirred the pot on what has been a bad-tempered battle. As we reported in WiC143, China Gas executives have slammed the Sinopec approach as a “totally uninvited hostile takeover”. But if a bidding war does now develop, it promises to be unusual in pitting two state-controlled entities – Beijing Enterprises Group, controlled by Beijing’s municipal government, and Sinopec – against one another.

There is also a theory that Beijing Enterprises Group might be representing PetroChina, also its partner in another gas distribution business linking Beijing with Shaanxi province. The claim is that PetroChina has the same interest in China Gas as Sinopec, and wants control of downstream, city-level distribution so that it can pipe in gas secured on long-term contracts overseas.

Here, the wider backdrop is the growing rivalry between China’s oil majors. As mentioned in WiC18, their former understanding was that they would operate in separate commercial and geographic areas. But the pact has now worn very thin. PetroChina’s parent CNPC has been raiding deep into Sinopec’s territory, 21CN Business Herald reported last week.

Both companies also want to strengthen their presence in natural gas, owing to government plans to boost its contribution to 10% of national energy consumption by 2020, from less than 5% in 2010.

Even so, analysts have been querying why PetroChina wouldn’t just buy China Gas shares directly through Kunlun Energy, its gas distribution arm. Kunlun raised $1.3 billion recently via an international share sale to grow its distribution business in LNG, including by acquisitions.

Perhaps more likely is that Beijing Enterprises Group is making the move on its own behalf. As the Wall Street Journal points out, the company already operates the capital city’s gas distribution concession, the biggest in the country. But its operations there are mature and price controls limit their profitability. By contrast, China Gas offers scope for growth, with concessions in 148 cities.

Of course, even in a worst-case scenario of losing out in a bidding war, Beijing Enterprises Group could hope to sell its stake for a chunky profit.

How will China Gas executives react to the news that another suitor has arrived on the scene? As WiC reported in March, they’ve been sniffy about the Sinopec offer from the start, and particularly the involvement of bidding partner ENN, a smaller rival.

“ENN controlling China Gas is not acceptable because it can be understood as a small fish eating a large one,” executives told reporters at the time. There is also resentment at what they see as a low-ball offer from Sinopec, timed to exploit a share price weakened by the arrest of Liu Minghui, formerly managing director, on embezzlement charges, last year.

Relations remain far from cordial. According to 21CN, China Gas bosses are refusing all invitations from their would-be acquirers to discuss the merits of the deal in person.

The final approval is down to the shareholders, of course, although the bid has also been held up by the wait for regulatory approval.

But increasingly it looks like Sinopec will have to raise its bid if it really wants to win control. It has the resources to up its offer. But a higher price looks like being more of a problem for ENN, which was already stretching itself financially to cover the initial offer.

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