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Hony Capital, the Beijing-based private equity firm backed by financial-to-computer conglomerate Legend, has agreed to increase its minority stake in indebted Australian oil and gas producer Santos for A$500 million ($352.8 million).
In a filing with the Australian stock exchange, Santos said on Monday that Hony will subscribe to 73.53 million of its shares at A$6.8 per share to help cut the company's debt and shore up its balance sheet.
The price paid by Hony, which also agreed not to divest its shares for 12 months, represents a 15% premium to Santos's closing share price on Friday of A$5.91.
Once the transaction is complete, Hony and its affiliate will own 7.9% of Santos, up from 1.4% currently. Hony will not increase its total holding above 9.9% in the next three months, the statement said.
A Beijing-based spokesman for Hony confirmed the deal but declined to comment on how the private equity firm will fund the transaction because it is still ongoing.
Hony’s investment forms part of a broader A$3.5 billion capital-raising plan at Santos, which also comprises a A$520 million stake sale in the Kipper gas field to the local unit of Japanese trader Mitsui and a A$2.5 billion rights offering at a hefty 35% discount to Friday's closing price.
The aim is to bring down Santos's net gearing ratio to about 40%, down from an onerous 89% in June, thereby protecting the company’s credit profile and ensuring its continued access to funds.
Shares in Santos have dropped by 28.3% in price so far this year, compared with a 5% decline in the country’s benchmark S&P/ASX 200 Index.
For China’s Hony Capital striking deals overseas is not something new.
Hony bought British restaurant chain PizzaExpress for abut £900 million ($1.54 billion) in July 2014. The seller was London-based private equity fund Cinven, which had taken PizzaExpress private in 2007 for £1.34 billion.
The acquisition of PizzaExpress was a landmark deal because it raised Hony's international profile and highlighted China's growing appetite for branded consumer goods in the West, as the country shifts to a domestic consumption-driven economy from a investment-led model.
Hony raised its first $38 million fund from state-sponsored investment firm Legend in 2003 and today has about $8 billion under management.
Legend, the controlling shareholder of Hong Kong-listed computer giant Lenovo, raised $2 billion in a well-timed Hong Kong listing in June, before China’s stock markets crashed.
