Energy companies from Oman to Beijing have been wrangling over one of China's largest natural gas distributors with an unusual bow to state-private sector teamwork.

The competition for control began in December when state-run oil company Sinopec (China Petroleum & Chemical Corp.) and privately-held ENN Energy Service Co. Ltd. joined forces in a hostile takeover bid for Hong Kong-listed China Gas Holdings Ltd. (US:CGHOF)(HK:384)

The offer was HK$3.50 a share, or HK$16.7 billion ($2.14 billion), for all China Gas shares that Sinopec (US:SNP) (HK:386)(CN:600028), a China Gas minority stakeholder, didn't already hold.

Immediate resistance came from China Gas' largest shareholder and founder Liu Minghui, who managed to block the takeover at least temporarily. One of South Korea's largest industrial conglomerates SK Group reacted as well by increasing its stake in China Gas.

The ownership struggle got more complicated in May, when a state-owned company under the Beijing municipal government with ties to state-owned China National Petroleum Corp. (CNPC) — Beijing Enterprises Group — also offered to buy a majority stake in China Gas.

It got a foot in the door by buying foreign minority shareholder Oman Oil Co. sold its China Gas shares — a 5.4% stake — to Beijing Enterprises Group in May.

Meanwhile behind the scenes, a source told Caixin, a pair of state-owned companies called China Resources (Holdings) Co. Ltd. and CITIC Capital Holdings Co. have been jockeying for control of the gas company since last fall.

With HK$15 billion in market capitalization, a controlling stake in China Gas would not come cheap. But the competitive field proves that a variety of energy companies see significant potential in China Gas, which has exclusive rights to operate pipelines in 151 cities across the country.

The stock's trading was suspended Dec. 6 in anticipation of a major announcement, and six days later the Sinopec-ENN team pitched its offer. ENN said it would buy a 55% stake, and Sinopec the rest.

Unconventional strategy
Market watchers were generally puzzled to see Sinopec and ENN collaborating directly. It's a more typical buyout strategy in China for a private concern to take over a company and then transfer ownership to a state-owned partner.

A Sinopec executive later explained to institutional investors that the oil giant got involved as a passive investor to learn from ENN's experience in the natural gas business.

Sinopec wants to expand into the urban gas market, said Xu Bo, a senior economist at CNPC's Economics & Technology Research Institute.

Sinopec is a relative latecomer to the gas business compared to CNPC, Xu said, and faces a variety of challenges. CNPC has already moved into the upstream and downstream gas industry by, for example, buying distributor PetroChina Kunlun Gas Co. Ltd.

But the Sinopec-ENN offer was outright rejected by the China Gas board of directors, calling it "totally uninvited" and "opportunistic in nature." More importantly, the board statement said, the duo's bid "failed to reflect the underlying value of the company."

To beat back the raiders, Liu partnered with energy company Fortune Oil Holdings Ltd. Together, they started increasing their China Gas holdings.

Liu and Fortune Oil formed a "persons acting in concert (PAC)" to act as a single investor. By end of May, the team had become the largest shareholder with a 17.3% stake. SK Group has also increased its holdings to 15.3% in recent months.

Left in the dust was Sinopec, with only 4.7% of China Gas stock.

Sinopec and ENN still had enough cash to muster up a higher, potentially more palatable bid in May. But their hopes were dashed when Beijing Enterprises started buying up shares in China Gas.

A source said Beijing Enterprises had been negotiating with China Gas even before Sinopec and ENN stepped onto the stage. Another source said the CNPC-linked firm had initially decided not to interfere if Sinopec tried to buy China Gas on its own, since it did not want to make a direct challenge, but would bid against a Sinopec-ENN team.

Beijing Enterprises invested in China Gas piecemeal starting in May, according to the Hong Kong Securities and Futures Commission. Eight share purchases gradually raised its stake to more than 14.9%, making it the company's third-largest shareholder.

As of May 29, nearly 48% of the shares were held by the Liu-Fortune Oil PAC, SK Group and Beijing Enterprises, none of which have wanted to play second fiddle to Sinopec-ENN.

Beijing Enterprises paid between HK$3.78 and HK$3.80 per share — substantially more than the original offer from Sinopec and ENN.

A source close to China Gas told Caixin that Beijing Enterprises' investment was welcomed by the company as "an expression of support." Tan Zhenhui, executive director at a Beijing Enterprises subsidiary, said the investment was a good value.

Shadow player
As of mid-June, shares of China Gas had risen some 36% from the Dec. 6 close to around HK$3.80.

Sinopec Chairman Fu Chengyu and ENN Chairman Wang Yusuo said early this year that the HK$3.50 offer "reflects the company's air value" and would not be increased. And although they made that ultimatum before Liu, Beijing Enterprises and others raised their stakes, ENN and Sinopec officials May 30 reiterated that they would not raise their offer.

Meanwhile, another type of wrangling over China Gas has been going on since at least Nov. 10, the date when another trading halt for company shares was announced on the Hong Kong bourse.

Four days later, China Gas announced that it had been approached by an independent investor interested in buying a relatively large stake. Officials declined further comment. A source close to the deal told Caixin the interested investor was CITIC Capital.

CITIC had contacted China Gas executives including Liu in October about buying the company. Its negotiators also approached China Straits Financial Holdings Co. Ltd., another minority stakeholder in the gas company.

CITIC's plan was apparently upset by the Sinopec-ENN acquisition offer, which sent share prices soaring.

"Due to price issues and because the company didn't want to compete with Sinopec, CITIC Capital withdrew," a source said.

Likewise, sources said, China Resources then scrapped its own preliminary plans to pursue a China Gas stake.