A consortium comprising Citic Capital, Boyu Capital, Canada Pension Plan, TPG and KKR have bid for a 30% stake in Sinopec’s retail unit, according to a source familiar with the matter.
The sale of Sinopec's stake in its retail unit, which includes more than 30,000 petrol stations and 23,000 convenience stores, is part of China’s efforts to court private capital to make its sprawling state-owned enterprises (SOEs) more efficient.
The stake in Sinopec’s retailing unit could fetch more than $20 billion, according to a Barclays research report in February. As of April 30, Sinopec's retail arm, known as Sinopec Sales, had assets worth Rmb341.7 billion ($55 billion).
State-owned Sinopec first announced its intention to sell the stake in February but the auction is still in its early stages and could take several months before a winner is announced.
“It’s well into the first round and there has been a lot of interest from financial investors,” said another source familiar with the matter.
The private equity firms will also face stiff competition from strategic investors and sovereign wealth funds. According to third source, China’s largest privately owned investment company Fosun has also submitted a bid.
Putting money to work
President Xi Jinping first unveiled his plan to court private investment at a Communist Party leadership gathering in November last year. Asset sales at centrally governed financial and industrial giants quickly followed. Beijing-based conglomerate Citic Group sold 16% of its capital to 27 institutional investors after injecting $36 billion of its assets into a Hong Kong-listed entity.
In mid July, Beijing's State-owned Assets Supervisory and Administrative Commission identified six companies as potential test cases for reform. The companies included State Development & Investment Corp (SDIC); Cofco; China Energy Conservation and Environmental Protection (CECEP); and Xinxing Cathay International. Two companies – healthcare giant Sinopharm and conglomerate China National Building Materials – were earmarked for introducing private capital. Bank of Communications, the mainland’s fifth largest lender by assets, earlier this week said that it is studying plans to introduce private capital.
China’s move towards a so-called “mixed ownership” structure and the government’s push to introduce private capital into its state-owned enterprises has opened up an opportunity for private equity firms.
“All of this is very good for private equity,” John Zhao, chief executive of private equity firm Hony Capital, told FinanceAsia. “I see more and more funds, both foreign and domestic, participating in SOE restructuring,” said Zhao. Hony has already been active in SOE restructuring and according to Zhao, it has made more than 30 investments in SOE restructuring over the past 11 years.
The government is pushing for Chinese state-owned companies to embrace private capital not just for the money but also to improve governance and financial performance.
For Sinopec, having outside investors could help the company improve retail sales at its petrol stations and lift margins for the retail unit, which have lagged behind Sinopec's exploration and production business.
Private equity funds in this consortium have plenty of operational expertise to draw upon. KKR has been investing in the energy sector for more than 20 years. KKR and TPG jointly invested in the largest ever $48 billion leveraged buyout of TXU in 2007. TPG sold its stake in Northern Tier Energy, a US downstream energy company with refining, pipeline and retail operations including convenience stores, last year at a substantial profit.
In the Asia-Pacific region, TPG was also one of the bidders for oil giant Shell's refining and retailing business in Australia, but was outbid by energy and commodities company Vitol, which acquired the downstream assets for $2.6 billion in February.
The Canada Pension Plan (CPP), which manages the country’s second-largest pension fund and one of the world’s top private equity investors, hired former Goldman Sachs senior Asia banker Mark Machin in 2012 with increased investment in China in mind. CPP is also keen to invest in retail and bolster its relationships with local funds such as Citic Capital.
To be sure, the lack of operational control will limit private equity players’ ability to put that expertise to use. It will also curb their willingness to pay a big price tag, given that sponsors usually want full control or some contractual agreements to protect their investment and enhance the value of their portfolio companies.
Sinopec Sales recorded a net profit of Rmb25.1 billion ($4 billion) in 2013 and the non-fuel business was only launched in 2008. Its non-fuel business posted a revenue of Rmb13.3 billion ($2.1 billion) for 2013. On average the non-fuel business contributes half of the profit for gas stations in mature overseas markets.
Bank of America Merrill Lynch, CICC, Citic Securities and Deutsche Bank are the financial advisors for Sinopec's sale.
Spokesmen for TPG and Canada Pension Plan declined to comment while a spokesperson for KKR said she was unable to comment on market speculation. A spokesperson for Sinopec said it is not in the position to disclose bidders and declined to comment. Spokespeople for Citic Capital and Boyu Capital could not be reached for comment.
Additional reporting by Jing Song