Chinese state-owned pipeline network operator China Oil & Gas Pipeline Network Corp., or PipeChina, has signed a deal to purchase assets worth more than $6.3 billion from Kunlun Energy.
The deal includes a 60% stake in Kunlun Energy's Beijing natural gas pipeline and a 75% stake in its Dalian liquefied natural gas infrastructure. Kunlun Energy, a subsidiary of PetroChina, owns most of the gas pipelines going to Beijing.
Analysts at Morgan Stanley said that the purchase price represented a 90% premium to the book value of Kunlun Energy's assets. Daiwa Capital Markets pegged the value at a 97% premium.
According to documents filed with the Shanghai Stock Exchange, PipeChina agreed to pay Kunlun Energy in cash over two installments. The deal is still subject to approval from regulators.
Kunlun Energy said in its stock market filing that half of the 37 billion yuan it will receive will be used on a special dividend. Around 40% of the cash will go toward developing its city gas utility business. The rest of the money will be used to pay down its debts, the company said.
Based on the breakdown indicated in its Hong Kong exchange filing, Kunlun Energy will have around 15 billion yuan in cash to use for potential acquisitions and expansion projects. Analysts said that this will put the company substantially ahead of its peers in terms of spending capability.
The asset purchase is part of China's continued efforts to secure its national energy security and consolidate its largest state-owned enterprises. The establishment of PipeChina was part of the strategy to integrate the country's major pipelines and other midstream entities into a single state-owned enterprise.
In July, PetroChina and China Petroleum & Chemical Corp granted PipeChina $56 billion worth of assets. This included cash and shares to the two companies' liquefied natural gas terminals, pipelines, storage and other facilities.
Through the continued consolidations, China is hoping to break down market barriers and increase overall productivity. Apart from the energy sector, state-owned enterprises in other industries have also slowly been consolidated into larger companies. This includes state-owned enterprises in the steel, manufacturing, automotive and high-tech sectors.
