Chinese power play switches Santos control

SANTOS is set to have its links with the global LNG market expanded, announcing this morning that emerging Chinese player ENN Group will be snapping up Hony Capital's 11.7% stake in the Adelaide-based oiler in a move described by one analyst as "corporate Chinese checkers".
Chinese power play switches Santos control Chinese power play switches Santos control Chinese power play switches Santos control Chinese power play switches Santos control Chinese power play switches Santos control

Haydn Black


ENN - which has recently been hovering over deals with Gorgon and Australia Pacific LNG for delivery later this decade into its 2.7 million tonne per annum Zhoushan receiving terminal in Zhejiang, China - will apparently pay $US750 ($1 billion) million to dig its claws into the operator of the Gladstone LNG project.

Santos "noted" the transaction this morning, which comes at a time when its share price is still struggling to recover to the heights of last November's $5.60, the level it was trading at before Hony bought in to become Santos' largest single shareholder.

Sources have told Energy News that Hony's passive, non-blocking stake in Santos was always intended to be transferred to ENN, and the deal team that organised both transactions, led by Chinese national Shi Yu Jiang, were substantially the same and the agreement never envisaged either Hony nor ENN to be simply a passive investor.

With ENN paying a substantial premium to market prices, Hony will avoid taking a loss on its investment.

Hony paid around a 15% premium over market prices and agreed not to divest its shares for at least 12 months when it upped its interest in Santos 1.4% to 7.9% last year as part of a $3.5 billion capital initiative organised by Santos chairman Peter Coates aimed at saving Santos from its cancerous debt.

While ENN now has a blocking stake in the event there is another takeover offer for Santos, such as last's year's bid from Middle East-based Scepter Partners, it is considered unlikely to launch its own a takeover offer for the South Australian oiler given that the Commonwealth would be unlikely to sign off on any bid for one of Australia's most strategically important energy producers.

Santos says it expects ENN - which is headed up Chinese billionaire businessman Wang Yusuo, who has a net worth estimated by Forbes at $US3.2 billion - will become a strategic investor in the SA oiler.

Hony, which is part of Legend Holdings Corporation, the controlling shareholder in computer maker Lenovo Group, will in turn become a major shareholder in ENN, a large private distributor of gas into the growing Chinese market that has started to make inroads in Australia.

Santos said it has "provided consent" to the transfer of Hony's recently increased stake in the SA oiler to ENN and added that, if the transaction completes, ENN's shares would continue to be escrowed until November 9.

Hony will also spend $US380 million via a private placement to become a major shareholder in ENN, which claims to be the largest private natural gas company in China, supplying 423 petajoules to 152 cities across the nation last year.

ENN says its stake in Santos, the largest operator in the Cooper Basin and controller of the Gladstone LNG plant, is its first exposure to the upstream part of the value chain, consistent with its strategy to develop into a vertically integrated international natural gas company.

Yusuo said the move into the upstream was "an exciting move for ENN".

"This introduction to the upstream sector takes us a step forward in our aim to generate value across the entire natural gas value chain, and allows us to learn and build

Experience," he said in a statement.

"Equally importantly, we are gaining a strategic investor and partner in Hony Capital whose deep China experience and global outlook can help us accelerate future growth overseas."

The growth of the ENN Group's natural gas sales volume by a CAGR of 47% from 2001 to 2015

ENN operates a network of 576 LNG and CNG stations across China, and distributes around 1.7MMtpa of LNG in China per year, around 20% of China's annual volume.

Hony chairman John Zhao said in a statement that bringing in ENN as a strategic investor will help Santos connect to the rapidly growing Chinese energy market.

The deal remains subject to ENN-EC shareholder approval and regulatory filings in China.

Santos recently posed a $A2.7 billion loss, at the same time Hony dropped a further $100 million to increase its stake in the oiler, just days after a ban stopping it from exceeding its 9.9% agreed cap expired.

Hony spent around $500 million in Santos last November as part of a share subscription at a price of $6.80 per share, just 8cps below the Scepter offer.

Santos shares closed yesterday at $3.92, were up around 2% to $4.01 in trade this morning.

In addition to Gladstone, Santos also has interests in the Darwin LNG and PNG LNG projects.


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