Sino Gas & Energy backs $530m takeover offer from Lone Star
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Glenn Corrie, CEO of SIno Gas & Energy, says the takeover offer is attractive. Peter Braig
by Angela Macdonald-Smith
Disappointed investors in Sino Gas & Energy have accused the board of agreeing to a sale of at too low a price after US private equity giant Lone Star secured the directors' backing for a $530 million cash takeover offer without any formal search for a higher bid.
As Australia's only indigenous gas producer in China, Sino Gas, which started production in late 2014, is well placed to benefit from soaring demand for gas in one of the world's biggest energy markets.
The 25¢ per share offer is a 32 per cent premium to the average share price in the month to May 30. But it is well below analyst target prices and only 1.5¢ above last week's high.
Managing director Glenn Corrie's view that the bid represents "an attractive premium" was countered by several investors on a conference call who said they would vote against the deal.
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Investors variously described the offer as "extremely opportunistic" and "a long way off the mark", while one said he was "incredulous" that Sino Gas was accepting such a "small" premium after working so hard to get where it is.
But Mr Corrie said that while Sino Gas' board remains convinced of the upside, getting there involved several risks, including funding concerns for Sino's Chinese joint venture partner.
"There's a prize out there and a journey and a pathway to get there, and that pathway we think has some risks and uncertainties associated with it," he said, noting that the market has failed to give Sino full credit for its achievements so far.
"We're asking shareholders to look at the entire picture."
Shares in Sino Gas jumped 11.9 per cent to close at 23.5¢. Trading at less than 9¢ a year ago, the shares have seen strong gains recently, including about 60 per cent this year, partly fuelled by speculation about takeover interest.
Some investors criticised the lack of a formal broader search for a higher offer and the fact Sino Gas has agreed to a "no shop, no talk" provision in the agreement with Lone Star. But Mr Corrie said Sino already had a good understanding of who would be interested.
Gas use across China expanded by about 20 per cent in 2017, almost triple GDP growth of 6.5 per cent, spurring local production as well as LNG imports. Sino's production of about 26 million cubic feet per day is due to climb to 38 million-42 million at the end of 2018 and reach 3-4 per cent of domestic gas supply in 2022. Low production costs of less than $US2 per thousand cubic feet and sales prices of more than $US7 make for healthy margins.
"Cashing out now at these levels feels as if it's too early in the story," said Hayberry Global Fund's Matthew Blumberg.
"It seems as if this is a great opportunity for Sino Gas to ramp up production in the next few years and generate significant free cash flow by taking advantage of the increased gas needs of the country amidst a changing economic landscape."
RBC Capital Markets and Allens are advising Sino Gas while Goldman Sachs and King & Wood Mallesons are understood to be in Lone Star's camp.
The offer is the latest effort by Lone Star to expand in Australia after an unsuccessful $421 million takeover proposal for AWE Ltd in 2016 and moves to explore bids for Network Ten, GE Capital's Australia commercial assets and Astro Japan. The firm has invested more than $US70 billion since it was set up in 1995.
Sino Gas directors' recommendation is subject to an independent expert's assessment of the bid. Shareholders will vote on the deal, which requires 75 per cent approval, in late August or early September.
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