Deal would create nation's biggest downstream natural gas distributor

SHANGHAI - China Petroleum & Chemical Corp (Sinopec) and ENN Energy Holdings Ltd on Tuesday made a cash bid of up to HK$16.7 billion ($2.15 billion) for the control of China Gas Holdings Ltd.

Sinopec, which has a natural gas pipeline network of 4,546 kilometers across China, expects a deal would quickly expand its share in the natural gas consumption market.[Photo/China Daily]

A deal will help the two companies gain access to the Hong Kong-listed China Gas' natural gas distribution network in 20 of China's provinces and regions.

China Gas has 6.6 million residential customers and about 42,000 industrial and commercial users in the Chinese mainland.

In a statement, ENN and Sinopec said they will offer HK$3.50 a share for China Gas, 25 percent above the last close on Dec 6, before trading in China Gas shares was suspended.

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.

ENN, the fourth-largest Hong Kong-listed gas supplier, will finance 55 percent of the deal and Sinopec will cover the rest.

China Gas this past month reported a fourfold gain in first-half profit, but the arrest of two senior executives caused the stock to slump this year.

China Gas resumed trading on Tuesday and surged 20.36 percent to close at HK$3.37.

Goldman Sachs Group Inc said in a research note that a deal will help China Gas' and ENN's joint natural gas sales reach 10.6 billion cubic meters in 2012, accounting for 7.1 percent of China's natural gas market.

A deal, according to Goldman Sachs, will create China's biggest downstream natural gas distributor and give the companies stronger bargaining power.

Goldman Sachs maintained a "neutral" rating for China Gas shares and forecast its net income at HK$950 million in 2012 and HK$1.2 billion in 2013.

The deal requires approval by China's anti-monopoly authorities. The board of China Gas hasn't responded to the offer yet.

The news portal Sina Finance quoted Deutsche Bank AG as saying that the bid might be hostile.

China Gas' shareholders include the Asian Development Bank, the Oman Oil Co and Indian gas company GAIL Ltd, according to its website.

The bidders said in the statement that they intend to maintain China Gas' business and management structure and will not take the company private.

ENN, which has 100 piped-gas projects in 15 provinces and regions in China, said in the statement that acquiring China Gas can help it expand market coverage in China and enter the Inner Mongolia autonomous region and Shaanxi province.

Sinopec, which has a natural gas pipeline network of 4,546 kilometers running throughout China, expects a deal would quickly expand its share in the natural gas consumption market.

China's natural gas use is forecast to surge, as the government aims to raise the fuel's share in total energy demand to 10 percent by 2020 from 4 percent in 2010.

According to the International Energy Association, China overtook the United States as the world's biggest energy consumer in 2009.