Sinopec’s China Gas Bid Hit by Greed, Indecision 中石化收购中国燃气料搁浅
As yet another deadline approaches for Sinopec’s (HKEx: 386; Shanghai: 600028; NYSE: SNP) strange hostile takeover bid for natural gas distributor China Gas (HKEx: 384), I’m going to make a prediction that may look bold but also seems increasingly obvious, namely that greed and indecision will ultimately kill this controversial deal. The unsolicited offer by Sinopec and partner ENN Energy (HKEx: 2688) for China Gas will officially expire on Tuesday, though it’s quite possible we might see the pair extend the deadline yet again, following several previous extensions. (English article) But based on the clumsy way Sinopec has handled the deal so far, I see no indication that it’s prepared to raise its offer.
That would be a deal killer because not only has China Gas refused to negotiate following Sinopec’s initial offer late last year, but several other opportunistic investors have also purchased big stakes in China Gas on expectation of a higher offer price or possibly a bidding war. A bidding war now seems unlikely since it’s been more than half a year since Sinopec first launched its bid (previous post) and no other potential suitors have come forward since then.
The steady stream of deadline extensions, combined with signals from Sinopec in March that a higher offer could be coming, previously led me to believe that perhaps China’s top oil refiner was preparing to sweeten its bid, even though the initial $2.2 billion bid already represented a 22 percent premium to China Gas’ share price before the offer. But now I’m starting to think that Sinopec has simply become frozen in a state of indecision since China Gas rejected its original proposal and isn’t really sure what to do next.
Frankly speaking, this entire tale — which would mark one of the biggest cases of hostile M&A by a big state-run Chinese company — has been quite strange from the start. To recap, Sinopec and ENN surprised everyone in December when they announced their initial bid. It soon became apparent that the pair had made little or no attempt to negotiate a friendly merger with China Gas before announcing their offer, a highly unusual move as clearly a friendly deal would have avoided the state of paralysis that has emerged since the original announcement.
China Gas quickly made it clear it thought the offer price was unacceptably low, and added it had no plans to enter into talks with Sinopec for a potentially better price. Despite the stalemate, China Gas’ shares jumped to near the level of the offer price, and several opportunistic shareholders started buying shares in anticipation of a sweetened offer that has yet to come.
Despite the stalemate, ENN shareholders have approved the purchase, and a new media report says Sinopec’s paralysis may be due to its lack of approval from China’s anti-monopoly regulator. At this point I’m personally quickly losing interest in this deal, which has lacked much drama and passion from Sinopec despite all the clumsy mixed signals.
All that leads me to believe that even if Sinopec extends its deadline tomorrow, this offer will ultimately quietly collapse, which won’t be very good for the speculators who bought China Gas shares on expectation of a higher offer. Perhaps the moral of this particular story is that investors should be highly skeptical of any hostile M&A attempts by major Chinese state-run firms, who clearly are not used to having their offers rejected.
Bottom line: Sinopec is showing no signs of sweetening its bid for China Gas, making a collapse of the hostile takeover bid increasingly likely.
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