State-run China Resources (836) Holdings Co.’s plan to combine two units is unlikely to survive a shareholder vote today, after the value of the $7.1 billion offer plunged following an accusation that the parent’s chairman deliberately overpaid for coal mines in 2010.
The target, China Resources Gas Group Ltd. (1193), closed trading Friday in Hong Kong about 17 percent higher than the value of the offer from China Resources Power Holdings Co., indicating investors consider the bid too low. China Resources Power offered 97 of its shares for every 100 shares in the gas unit.
The shareholder vote in Hong Kong follows a controversy last week over the 2010 purchase of three coal mines in Shanxi province. All five of the parent company’s units traded in Hong Kong sank after allegations against it and Song Lin, the parent’s chairman, were posted by the official Xinhua News Agency to its website on July 17. The parent is now being audited by the government, Xinhua reported July 19. Xi Jinping, who became China’s president in March, has pledged to investigate and eliminate corruption at the highest levels.
The offer “has little chance of receiving a nod from independent shareholders from both the buyer and the target,” said Shi Yan, an analyst at UOB-Kay Hian Ltd. inShanghai. “Other than price, investors need to know why this merger makes sense, a question both companies’ common parent has failed to effectively address.”
China Resources Holdings is being audited by the State-owned Assets Supervision and Administration Commission, which has started reviewing company accounts, Xinhua reported, citing an unidentified official at the agency. SASAC will severely punish any misconduct, according to the report.
Two calls to the company’s general office went unanswered. Two calls to the SASAC spokesman’s office went unanswered.
China Resources Power said July 18 it paid a fair price for the assets after getting two independent assessments. It hadn’t made the deal public because the company said its equity interest in the projects was below the disclosure threshold.
The plan to integrate the power and gas units comes amid pressure in China for power generators to reduce pollution by shifting to cleaner fuels, such as natural gas.
The deal valued China Resources Gas at HK$24.64 a share, or HK$54.8 billion ($7.1 billion), including debt, a 13 percent premium to its closing price of HK$21.85 on May 9. China Resources Power shares have since tumbled from HK$25.40 on May 9 to HK$16.86 on July 19, valuing the gas unit at HK$38.56 billion.
The gas unit hasn’t traded below the offer price since May 27 and the gap has widened sharply after the overpayment accusation, with the power unit’s shares falling 16 percent in three days. China Resources Gas was trading just 6 percent above the value of the bid on July 16, the day before Xinhua first posted the allegations.
China Resources Power rose 4.9 percent to HK$17.68 a share at 11:03 a.m. in Hong Kong, while China Resources Gas was up 1.9 percent at HK$19.54, leaving the gas unit about 14 percent above the value of the offer.
“The company has not changed the offer,” a China Resources Power media official said July 19, declining to give her name, citing company policies. “The company will keep investors posted if anything happens.”
Senior management at China Resources Gas have said privately that they don’t expect the bid to be raised, a person with knowledge of the matter said. The person asked not to be identified because the information isn’t public.
China Resources Power shareholders will vote on the deal today. It needs approval by half of the company’s minority shareholders, who represent 36 percent of the company’s equity. It will later be presented to minority shareholders in the gas unit, who also account for 36 percent of the company. The deal requires more than 75 percent of their approvals, with no more than 10 percent of minority shareholders casting a veto.
“As the deal’s popularity was already questionable before the current allegations, it looks very unlikely at this point that the deal can get approvals from minority shareholders of both companies,” Wu Fei, a Hong Kong-based analyst at Bocom International, said July 19. “I don’t see any reason why China Resources Gas shareholders would want to associate with China Resources Power, especially amid all the uncertainties created by the scandal.”
China Resources Holdings employs more than 400,000 people and controls businesses spanning power generation, cement production, real estate and finance. Unit China Resources Enterprise produces the country’s best-selling brand of beer with SABMiller Plc. (SAB) In 2012, China Resources Holdings had HK$41.2 billion of profit on HK$404.6 billion of sales, according to its website.
In his letter, Xinhua’s Wang alleged that Song and other executives deliberately overpaid for the mine assets. China Resources Power bought an 80 percent stake in the mines for 7.9 billion yuan, while another company had offered to pay 5.2 billion yuan for the entire asset a few months earlier, according to the letter, which was addressed to the Communist Party’s Central Commission for Discipline Inspection.
A group of minority investors said July 18 they had filed a lawsuit in Hong Kong making similar allegations and demanding the company forfeit the purchase. They have no connection with Xinhua’s Wang, Li Su, founder of Hejun Vanguard Group, which is representing the investors, said at a briefing.
Datong Coal Mine Group is the company that planned to buy the same assets for 5.2 billionyuan in 2010 before walking away from the deal, according to the letter posted by Wang
Datong Coal has no connection with China Resources Power’s 2010 purchase and won’t comment on anything concerning the deal, a media official who only gave his surname as Liu, said by phone on July 19 from the company’s headquarter in Datong, Shanxi.
Three calls to Shanxi Jinye Coal Coking Group Co., the seller of the assets, went unanswered on July 19.