Sinopec's China Gas bid flames out

Sinopec's scrapping of its hostile bid for China Gas means big state-run Chinese firms are unlikely to make more similar unfriendly M&A attempts in the near term.

Doug Young

Published: 11:08am, 16 Oct 2012

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One of the more entertaining and strange cases of hostile M&A by a big state-run firm has quietly flamed out, with the announcement by oil major Sinopec (0386.HK; Shanghai: 600028; NYSE: SNP) that it's dropping an unsolicited bid for piped gas distributor China Gas (0384.HK). I'll admit that I'm not surprised the story has ended this way, even if I'm just a tad disappointed that we didn't see just a few more fireworks in what was otherwise a colourful story that seemed to involve plenty of bumbling and indecision from Sinopec. I will also add that I don't have much sympathy for the speculators who will probably lose money after buying big stakes in China Gas on the hopes that Sinopec would raise its original bid for the company made back last December.

Sinopec and bidding partner ENN (2688.HK) apparently abandoned their bid after failing to win regulatory approval for the deal, which would have valued the privately run China Gas at more than US$2 billion. Resistance from China Gas was apparently also a factor, as Sinopec feared it could face major integration issues even if its hostile bid did succeed.

China Gas shares not surprsingly fell 5 per cent to HK$$4.10 when a trading halt was lifted on Tuesday. The company's shares had traded at around the HK$2.75 level before Sinopec and ENN made their initial offer to buy the company for HK$3.50 per share late last year. After that they rose as high as HK$4.30, as speculators bet that Sinopec would make a higher offer after China Gas rejected the initial offer.

Let's step back for a moment and take a quick look at the history of this strange deal, which in many ways reflects the inexperience of major Chinese state-run firms at hostile M&A. The initial bid looked positive enough, offering China Gas shareholders a nice premium for their stock. But a chilly reaction from China Gas management soon made it clear that Sinopec had made little or no effort to negotiate a friendly purchase first, in one of the first signs that the deal could face many obstacles.

Despite being rebuffed, Sinopec refused to abandon the deal, and even extended the deadline for its offer several times. At the same time, it never entered formal negotiations with China Gas or raised its offer. Instead, it applied for regulatory approval, even though no formal deal had ever been signed. And in another strange development, ENN even held a meeting at which its shareholders approved the deal, again even though no formal deal had ever been signed.

In the end, Sinopec appears to have finally scrapped the merger attempt after meeting with resistance from the Chinese regulator, which has been encouraging more private investment in industries now dominated by big state-run firms. China Gas and Sinopec ultimately decided instead to form a partnership to develop natural gas assets in China, though observers said that was mostly a face-saving move for Sinopec.

So what's the moral of this colorful and strange story? Perhaps we could see the two companies ultimately do a friendly deal, as the modest drop in China Gas shares after Sinopec's announcement indicates investors may still think a purchase is possible. At the very least, we probably won't see very many more hostile M&A bids for private Chinese firms by big state-owned companies in the near future.

Bottom line: Sinopec's scrapping of its hostile bid for China Gas means big state-run Chinese firms are unlikely to make more similar unfriendly M&A attempts in the near term.

The opinions expressed in this article are the author's own. To read more commentaries from Doug Young, click on youngchinabiz.com

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