AAG Energy: How private equity duo missed sale window

Warburg Pincus and Baring, are exiting the Chinese natural gas producer at just HK$1.75 per share, way down on the HK$3 IPO price just three years ago.

Private equity giants Warburg Pincus and Baring Private Equity are to sell their combined 46% stake in AAG Energy for HK$2.9 billion ($366 million), putting an end to their lengthy investment in the Chinese natural gas exploration company.

The pair will sell their stakes to Xinjiang Xintai Natural Gas as part of its voluntary offer for a 50.5% stake in the Hong Kong-listed natural gas producer, according to an announcement from the target company.

Warburg Pincus , which holds 25.21% of the company, and Baring PE, which holds 20.56%, will sell their entire stakes. The pair invested in AAG in 2010 and 2008 respectively. Xinjiang Xintai will acquire them at HK$1.75 per share, representing an 8.7% premium to AAG’s closing price of HK$1.61 on Friday.

The two private equity firms are making the most of a recent uptick in AAG’s share price amid signs its operations are starting to improve after a difficult time since its 2015 IPO.

AAG said last month its net profit for the year to December 31 was up 71.9% year-on-year to Rmb183.2 million ($29 million). It cited production volume growth, an increase in gas prices, as well as stringent cost control for the improvement. Its net margin improved to 33.8% from 25.9% in 2016.

Such positive results propelled AAG shares to an 11% rally, extending the 35% gain already achieved since the beginning of the year.

However, the current level is still far from AAG’s HK$3 offer price during its initial public offering in July 2015. At that time, Warburg Pincus and Baring decided against selling their stake through the IPO in the hopes of further gains as a public company.

It was a vote of confidence in the company, given this was AAG’s second attempt to secure a public listing. The company attempted to list in 2012 but the plan failed after getting less-than-expected support from public investors.

Going against their expectations, AAG shares plunged by over 50% within three months of the flotation and have since hovered around the HK$1.3 level. The overall bearish sentiment towards energy stocks at the peak of the oil price collapse in 2015 and a lack of equity research on the company were among the reasons blamed for the underperformance.

Shanghai-listed Xinjiang Xintai said the acquisition would give it access to AAG’s coal-bed gas assets and benefit its long-term development. AAG has majority interests in two coal-bed methane drilling wells, namely Panzhuang and Mabi, in southwest China’s Shanxi province.

Xinjiang Xintai said it would settle the acquisition with internal cash and an Rmb1.5 billion loan from China Minsheng Bank. It will maintain AAG’s listing after the acquisition.

Citigroup is the sole financial advisor to Xinjiang Xintai.

¬ Haymarket Media Limited. All rights reserved.
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