China Gas Holdings, one of the nation's largest city-gas distributors, has agreed to pay US$400 million for the gas assets of London-listed petroleum and gas distributor Fortune Oil, in the latest industry consolidation deal.
China Gas has agreed to pay Fortune US$340 million for its 85 per cent stake in the gas assets, and pay US$60 million for the remaining 15 per cent held by Singapore-listed edible oil and sugar producer Wilmar International.
The gas assets include city-gas distribution projects, gas pipelines, liquefied natural gas buses and vessels refuelling operations in northeast China and the Yangtze River, and a project to produce gas trapped between coal seams in Shanxi province.
"We believe there are synergistic benefits from combining the two companies - enlarging the natural gas operations to 200 cities [compared to 172 cities operated by China Gas alone], connecting upstream, mid-stream and downstream businesses," said Fortune Oil chief executive Tee Kiam Poon.
China Gas will pay US$200 million cash upfront for the assets, with the remaining US$200 million to be settled by the end of next year in cash. Fortune has an option to require China Gas to settle the second US$200 million payment by issuing up to 250 million China Gas shares.
The deal requires approval by the two firms' shareholders and Beijing's clearance after anti-monopoly vetting.
Fortune and China Gas' largest shareholder Liu Minghui have a joint venture that holds 18.4 per cent of China Gas.
Fortune's gas assets posted a pre-tax profit of £7 million (HK$87.73 million) in this year's first half and £18 million last year.
Fortune has agreed to compensate China Gas on a dollar-for-dollar basis if the net profit of the gas assets is less than HK$200 million next year, or if it is less than HK$400 million in 2014. This corresponds to a price-earnings multiple of 15.6 for next year's earnings and 7.8 times for 2014, compared to 17.6 times of China Gas for next year and 15.6 times for 2014, according to average estimates of analysts polled by Thomson Reuters.
An analyst at an Asian brokerage said since having a big operating scale is key for city-gas operators to bolster their bargaining power against the nation's three state-backed gas producers, joining forces with a larger player would ensure survival of the smaller players. A lack of new projects also drove big players to acquisitions for growth.
China Resources Gas in May this year agreed to pay US$238 million for a portfolio of gas distribution assets operated by the United States' AEI Energy in mainland China.
China Gas offered to buy rival Zhongyu Gas Holdings for about HK$2.1 billion almost three years ago.