China Gas, which has a market capitalisation of HK$16.26 billion, is back in the spotlight after a run of media headlines in December 2010.

They concerned a power struggle in the boardroom that led to Liu's arrest and detention by the police in Shenzhen on alleged embezzlement of the group's assets, and a subsequent board reshuffle in February last year.

The Sinopec-ENN consortium is bidding to create China's largest piped-gas firm, vying for the No 1 position in terms of gas sales held by Hong Kong and China Gas - or Towngas.

ENN plans to combine its 100 piped-gas projects with China Gas' 151-strong portfolio. Liu's role in the Fortune Oil alliance fuelled uncertainty over the Sinopec-ENN bid.

An informed source said Liu (pictured), the founding shareholder of China Gas and a core architect in building the company from scratch about 10 years ago, was released on bail in Shenzhen in November after being detained for almost 11 months by Shenzhen police.

'He is flying around the mainland to resume contact with local acquaintances,' the source said. 'He can't leave the mainland, so his return road will be through his joint venture with Fortune Oil.'

A source close to the China Gas board said it was not feasible for Liu to return to the board at this stage partly because the investigation by Shenzhen police was continuing. Liu was ousted from the board a year ago for failing to perform his fiduciary duties. He has not asked to return, so far.

Fortune Oil, which supplies gas on the mainland and is listed on the London stock exchange, surprised the market by setting up a 50-50 joint venture with Liu on December 30.

Liu injected 4.56 per cent of China Gas shares into the joint venture at HK$3.50 each, while Fortune Oil contributed cash and 94.04 million China Gas shares, or 2.15 per cent of the issued share capital. This valued the joint venture at HK$700 million.

Together with his personal interest of 3.5 per cent in the gas firm, Liu and Fortune Oil - deemed to be 'parties acting in concert' under the Securities and Futures Commission takeover code - emerged as the single-largest minority shareholder of China Gas with a combined interest of 10.56 per cent.

'We will keep buying China Gas shares on the market and have no intention to sell our stake,' a senior executive at Fortune Oil said anonymously on Friday. 'We do not intend to swallow the company, but we want friendly co-operation with China Gas.'

Fortune Oil, which has operated oil and gas supply and infrastructure in Beijing, Liaoning, and Shenyang for 20 years, wants to leverage China Gas' distribution network in 150 cities to meet its ambition of covering all aspects of the supply chain for liquefied natural gas.

It is attracted to China Gas' deep penetration into natural gas refilling stations for vehicles, with 112 stations on the mainland.

'China Gas has built such an intricate distribution network in the past 10 years that replication is not viable financially and geographically,' the Fortune Oil source said. 'It is not viable to compete alone against other big boys like China Resources Gas and Towngas.'

Both sources said they had not yet had any discussions on possible co-operation in gas supply on the mainland.

China Gas joint managing director Eric Leung Wing-cheong declined to comment.

The Sinopec-ENN offer raises intriguing issues.

During a recent marketing tour of China Gas, institutional investors often asked why state-controlled Sinopec had teamed up with an outsider to take over the gas firm, in which it has held a 4.79 per cent interest since 2004, according to a source close to China Gas.

Investors are also baffled as to why Sinopec took a minority 45 per cent stake in the joint venture with ENN to launch the takeover bid, which will give it a minority interest in China Gas if the bid is successful.

The China Gas board, composed of representatives from substantial shareholders such as GAIL of India, SK Group, and Oman Oil, criticised the offer as 'wholly unsolicited' and 'opportunistic', and said it 'failed to reflect the fundamental value of the group'.

While the Sinopec-ENN consortium remains silent on the offer, a substantial shareholder of China Gas is quietly buying shares in the stock market to fend off the consortium's interest in the company.

Chey Tae-won, through his units SK Gas and SK E&S of South Korea, raised his stake in China Gas to 7.04 per cent on January 4 from 6.09 per cent on December 30, based on filings to Hong Kong Exchanges and Clearing.

The purchases, at prices between HK$3.576 and HK$3.685 a share, effectively rejected the Sinopec-ENN cash offer of HK$3.50 for each China Gas share.

The offer price now looks meaningless since the price of China Gas shares has soared 32.5 per cent to HK$3.71 since the December 12 offer, which was at the time a 25 per cent premium to the share's close on December 6 before trading was suspended. The offer was also at a 40.1 per cent premium to the average close in the 30 trading days before that date.

There is other bad news for ENN as credit rating agencies Moody's and Standard & Poor's threatened to downgrade its credit rating to junk last month.

Brokers said the rises by China Gas shares since the December offer pointed to the gas company being underpriced.

'The pork is too fatty to let go,' investment firm Lyncean Holdings managing director Francis Lun Sheung-nim said. 'It is one of the most interesting merger and acquisition battles in recent years.'

UBS, which last Thursday recommended a 'buy' on the stock with a target price of HK$4, said the offer price must be raised if it was to be successful.

However, some analysts expected that Sinopec and ENN are unlikely to raise the price until obtaining clearance from government authorities such as the Ministry of Commerce regarding potential anti-competition issues.

On top of this, the pair must meet a number of pre-conditions including approval by ENN minority shareholders in an upcoming shareholders' meeting before proceeding with a formal offer.

6.08m

Residential customers were served by China Gas last year

- Its natural gas sales increased 31.7 per cent last year on 2010