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Eric Ng

First H-share privatisation could cost state petrochemical company $3.46b  in move to streamline group structure

In what could be the first H-share privatisation deal, China Petroleum & Chemical Corp (Sinopec) is set to launch a buyout of  subsidiary Sinopec Beijing Yanhua Petrochemical, industry sources say.

The move, which could see the mainland's largest petrochemical manufacturer spend  more than  $3.46 billion to  buy all the shares it does not already own,  would help streamline its organisational structure and cut expenses.

The valuation is based on Yanhua's $3.425 closing share price on Tuesday, but analysts said Sinopec would have to sweeten its offer  to convince shareholders to sell.

It would be Sinopec's third deal to cut  the number of listed vehicles  incurring regular costs in financial statement auditing, listing rules compliance and investor relations promotions.

The company has four H-share companies and eight mainland A-share vehicles.

Sinopec has a 70 per cent stake in  Yanhua,  the mainland's largest maker of resins and plastics -  key  raw materials for the country's  fast-growing toy and car industries.

Sinopec might pay cash for the deal, although the  payment terms had not been finalised as various options, including a share issue, were being considered, the sources said.  It had 14.27 billion yuan at the end of June.

Trading of Yanhua's shares was suspended yesterday pending an announcement of price-sensitive information.

The suspension could last more than  a week, the sources said. Sinopec  declined  comment.

On Tuesday, its shares surged 5.4 per cent on speculation of privatisation or asset restructuring between the two companies.

Yanhua this month said it was in preliminary talks on a possible restructuring.

Analysts questioned the timing of the privatisation, saying it might not be advantageous to Sinopec's shareholders as they believed the current petrochemical boom  was nearing its peak.

'There appears to be some problems with the privatisation's timing and Sinopec management's judgment,' Kim Eng Securities head of research Eva Chu Wen-yee said. 'It will be quite an expensive deal on a book value basis.'

When Sinopec was listed in 2000, it said it would gradually reduce the number of listed vehicles.

It did not privatise the four H-share firms - considered some of the best assets among its listed subsidiaries - in 2001 and 2002 when their share prices hovered between 50 cents and $1.40 during the industry downturn.

However,  the company did  start the streamlining process by dumping  two A-share vehicles  that were either not performing well or were too small. In 2002, it  sold its  stake in Hubei Xinghua to a third party.  In July, it agreed to sell a 40.72 per cent stake in  Sinopec Wuhan Phoenix, although  the deal is  waiting for regulatory approval.

In both cases, Sinopec agreed to buy back the petrochemical assets from the buyers, effectively selling them only the listing vehicles.

Ms Chu said among Sinopec's four H-share firms, only Yanhua and Sinopec Zhenhai Refining & Chemical did not also have A shares, making them easier privatisation targets.

As A shares generally command a substantial valuation premium to  H shares of the same company, Sinopec may have to offer a price higher than the market prices of both classes of shares to secure   a privatisation deal.

However,  this raises  a fairness issue  as H-share holders would be given a bigger premium.

Spokespeople of the three H-share firms other than Yanhua said there was no imminent privatisation plan by Sinopec.

Analysts said Zhenhai Refining was less likely to be privatised as it had major expansion plans and might need to raise funds through share issues.



Sinopec to launch bid for buyout of Yanhua