China Petrochemical Corporation, better known as Sinopec, is back on the acquisition trail after a brief hiatus and yesterday announced its biggest deal so far this year, paying C$2.2 billion ($2.1 billion) for Daylight Energy, an oil and natural gas producer with assets in Alberta and British Columbia in Canada.
The price translates to a per share price of C$10.80, which is a 44% premium to the 60-day weighted average price of Daylight on the Toronto Stock Exchange up to October 7. However, Daylight’s share price has been falling as equity markets worldwide grow increasingly nervous about macroeconomic conditions and closed at C$4.59 on Friday. The price at which Sinopec has struck a deal is more than twice Friday’s price.
The deal will be struck by Sinopec International Petroleum Exploration and Production Corp, a wholly owned subsidiary of Sinopec, which is a state-owned enterprise (SOE) and China’s second-biggest producer of crude oil after CNOOC. The deal brings under Sinopec’s control the more than 300,000 acres of land in western Canada that Daylight owns, which holds oil, natural gas and natural gas liquids such as ethane and propane.
Early last year Sinopec bought a 9.03% equity interest in ConocoPhillips oil sands project Syncrude for $4.65 billion. Syncrude, which is also located in Alberta, is the largest oil sands project in the world. Later in the year Sinopec forged an $18 billion joint venture with Repsol, an independent upstream-oil operator in Brazil. Sinopec paid $7.1 billion for a 40% stake in the JV. Some specialists have commented that in the last few years China's SOEs have enhanced their focus on countries where they feel their capital is more welcome and the deals they ink have a better chance of securing regulatory clearances.
“We believe this transaction with [Sinopec] recognises the highly attractive asset portfolio and exceptional team that we have assembled at Daylight,” said Anthony Lambert, president and chief executive officer of Daylight in a written statement. “The efforts and accomplishments of this team will be built upon through increased investment in the business and acceleration of our development and exploration opportunities.”
And therein lies the ultimate card that the Chinese are playing while pursing cross-border deals. China’s healthy reserves position means that its acquirers can pursue deals confident in the knowledge that funding for both the deals and future development needs is forthcoming. Respondents to our annual M&A survey, which we published today, predict that outbound deals from China's companies in the natural resources sector will remain a defining feature of Asia's M&A landscape.
No wonder then that Daylight’s board is unanimously recommending the deal and voting their block of shares in favour. The deal, which is intended to be executed through a scheme of arrangement, requires the approval of two-thirds of Daylight’s shareholders present in person or by proxy at a special meeting. It is also subject to regulatory approvals in both China and Canada.
A break fee of C$100 million is payable in the event the deal does not close, by either buyer or seller who aborts the deal.
Barclays Capital is advising Sinopec with legal advice from Vinson & Elkins and Bennett Jones. Canaccord Genuity Corp is acting as financial adviser to Daylight and has provided the board of Daylight with a fairness opinion. CIBC World Markets is financial adviser to the board of Daylight and has also provided a fairness opinion. Blake, Cassels & Graydon is legal counsel to Daylight.