NEW YORK (The Deal) -- Shares in China Petroleum & Chemical Corp. tumbled more than 8% on Monday as investors expressed their disappointment at a deal to sell a 30% stake in its petrol retailing network for 107 billion renminbi ($17.4 billion).
China Petroleum, known as Sinopec, will sell the stake to a consortium of 25 investors to provide a capital injection for Sinopec Marketing Co. Ltd. The deal values the unit's equity at Rmb357 billion, about 20% above its book value.
Sinopec Marketing buys and distributes gas produced by Sinopec through a Chinese network of 30,351 service stations, pipelines and storage facilities. It shifted 180 million tons of refined oil products in 2013, generating an operating income of Rmb1.5 trillion and Rmb25 billion of net profit, according to its audited accounts.
The sale is part of a government initiative launched in February to introduce private ownership into Sinopec Marketing to improve management and raise funds to modernize its network of service stations and associated retailing outlets. Sinopec Marketing operates 23,400 convenience stores under the Easy Joy brand. It made Rmb13.3 billion of non-fuel sales in 2013.
Sinopec, which is listed on the Hong Kong exchange, also hoped to boost its own value "through the value discovery of Marketing Co.," the parent claimed. That hope appeared misplaced on Monday as investors reacted to the deal by sending Sinopec's Hong Kong-listed shares down to HK$7.25, just over 8%, or HK$0.64, lower than their Friday close.
Analysts said that they were surprised by the valuation of the retailing unit. The sale values the marketing unit at about 7.2 times its forecast 2016 Ebitda, according to Macquarie Group. The broker had expected a valuation of closer to 10 times Ebitda, it said in a note published on Monday.
Stakes of between 2.8% and 0.28% will be sold to 25 financial investors from China and Hong Kong.
Amongst the investors spending the maximum Rmb10 billion for a 2.8% stake are a fund backed by Asian Internet company Tencent Holdings Ltd., and Chinese fund managers Harvest Capital Management Co., China Life Insurance Company Ltd., and CICC Qian Hai Development Fund Management Co. Ltd.
Investors in the capital injection have agreed a three-year lockup period. They will have pre-emptive rights to increase their stakes in the event of a further share sale by Sinopec Marketing. Sinopec has a pre-emptive right to buy back the investors' stake should they seek to sell their holdings.
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