Wednesday, June 24, 2009 1:12:50 PM
Last Update: 6/24/2009 1:11:41 PM
By Kevin M. Nichols and Jamie Miyazaki
A DOW JONES NEWSWIRES COLUMN
NEW YORK/HONG KONG (Dow Jones)--The $7.2 billion all-cash acquisition of Addax
Petroleum Corp. (AXC.T) by China Petrochemical & Chemical Corp., or Sinopec,
restores M&A on the forefront of Chinese business.
Sinopec's purchase of Switzerland-based Addax marks China's largest oil and gas
deal in history, trouncing the previous record held by CNOOC Ltd.'s (CEO) $4.3
billion purchase of Awilco Offshore last year.
Overall mergers and acquisitions activity from China, however, is down 39% year
over year, according to Dealogic. But that could change given both the amount of
cash Chinese corporations currently hold and the value to be had in expansion.
Buying Addax fits with China's objective of securing strategic resources as well
as growing its domestic companies. PetroChina Co. (PTR) last month invested in
Singapore Petroleum Co. (S99.SG).
As a refiner, Sinopec is highly dependent on crude imports and vulnerable to any
long-term secular rise in oil prices. The Addax acquisition partially fixes this.
Sinopec is primarily interested in Addax's operations in Nigeria, Gabon and the
Kurdistan region of Iraq, which until recently was protected from foreign
ownership. Sinopec last year paid $2 billion for Canadian outfit Tanganyika Oil,
which has primary assets in northeastern Syria, a strategic fit with Addax's
Kurdistan assets.
Sinopec and Brazil's Petroleo Brasileiro (PBR), or Petrobras, have a cooperation
agreement in oil and gas exploration, refining, petrochemicals, and the supply of
goods and services that could come in handy in western Africa. The deal allows
Sinopec to tap into Petrobras' ultra-deepwater oil and gas operations experience
- Petrobras contracts 80% of the world's supply of deep-water rigs - to explore
regions that were previously off limits due to technical constraints.
Also, Sinopec Group has a subsidiary called Sinopec International Petroleum
Exploration and Production Corp. (SIPC) that undertakes overseas investments and
operations in the upstream oil and gas sector.
Sinopec is looking to build on its 2.8 billion barrels of proven reserves by
adding to its portfolio Addax's 536 million-plus barrels of proved and probable
reserves. Addax averaged production of 136.5 million barrels a day last year.
Addax's healthy balance sheet makes the transaction easy from Sinopec's
perceptive. Addax's net debt before earnings, interest, taxes, depreciation and
amortization is a mere 0.5x. That compares to 1.30x for competitor Canadian
Natural Resources (CNQ.T).
Addax's stock has outperformed its peers by an average of nearly 78% year to
date. Shares hit a 52-week low in December 2008, whereas most energy-related
companies hit theirs in March of this year and rallied form there.
The offer represents a 47% premium to Addax's share price when the company
announced it was in preliminary discussions regarding a transaction earlier in
the month, and a 15% premium to Tuesday's closing price.
The breakup fee is C$300 million and would have to be born by Sinopec. The deal
is also subject to approval from the Chinese government, the Baghdad Oil Ministry
and Canadian officials.
The deal opens the door to the possibility of further M&A activity in new regions
by Chinese companies. Previously, the Chinese have avoided the Middle East and
focused on acquiring oil and gas territories in Asia and South America.
Investment bankers are also keeping a close eye on Aluminum Corp. of China Ltd.
(ACH), or Chinalco, to see how it wants to proceed following the collapse of its
proposed deal with Rio Tinto PLC (RTP). Chinalco has registered for Rio's rights
issue but has not determined if it will participate; it has until next week to
decide. Chinalco still has $1.96 billion in cash on the balance sheet for
possible deals.
Meanwhile, CNOOC and PetroChina have nearly $15 billion of cash between them. The
Sinopec deal will trigger some of that buying power.
(Kevin M. Nichols is a columnist for Dow Jones Newswires on the energy,
industrial and auto sectors. He has more than seven years experience as an
analyst and trader on Wall Street and was formerly an executive in the
proprietary trading unit at an investment bank. He can be reached at +1 (212)
416-2104 or by email: kevin.nichols@dowjones.com. Jamie Miyazaki is a columnist
for Dow Jones Newswires covering Asia. He can be reached at +852 2832 2320 or by
email: jamie.miyazaki@dowjones.com. Dow Jones Newswires is enhancing its news,
commentary and analysis for the investment banking community, and is providing it
on this service temporarily. To ensure continued access to the best of Dow Jones
news and opinion on companies, sectors and deals for bankers and research
analysts, please contact investmentbanker@dowjones.com.)
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(END) Dow Jones Newswires
June 24, 2009 13:11 ET (17:11 GMT)
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