Sinopec Picks Partners, Dilutes Beijing Private Capital Plan

Sinopec picks 25 partners for retail JV

It seems that oil refining giant Sinopec (HKEx: 386) just can’t say “no” when it comes to choosing partners for its new retail joint venture, which is part of Beijing’s pilot program to inject more private money into big state-owned enterprises. That’s my quick assessment, following the company’s announcement that it has chosen a whopping 25 mostly domestic partners for the new venture, which will own and operate the company’s vast network of gas stations and convenience stores throughout China.

I’ve been covering the Chinese corporate scene for quite a while now, and can truthfully say that 3 or 4 partners in a single joint venture is already considered a lot. In short, I’ve never seen so many partners named for a single joint venture, and suspect Sinopec is taking this strange move to avoid having to give any of these numerous partners any actual voice in the running of its retail unit, Sinopec Sales.

This kind of strange tactic isn’t all that surprising, and is relatively typical when Beijing tries to force big state-owned enterprises like Sinopec to become testbeds for market-oriented reforms. Before we go any further, let’s recap the latest news that came out in an announcement from Sinopec over the weekend. (company announcement) The 25 chosen partners were among a large field of investors vying to buy 30 percent of Sinopec Sales, which owns 30,000 gas stations and 23,000 convenience stores around China.

The investors will collectively fork out $17.5 billion for the stake, which means each will pay an average of $700 million for just over 1 percent of the unit. The list of investors includes many of the names that have been mentioned in previous reports, including ENN Energy (HKEx: 2688), Fosun International (HKEx: 565) and Internet titan Tencent (HKEx: 700), just to name a few. (English article)

Other noteworthy names on the list include insurance giant China Life (HKEx: 2628; Shanghai: 601628; NYSE: LFC), and an asset management company controlled by leading state-run bank ICBC (HKEx: 1398; Shanghai: 601398). The big majority of partners are pure investors, most of them China-based, without any apparent interest in strategic cooperation with Sinopec’s vast retailing network of gas stations and convenience stores.

The sale marked the first of its kind by a big state-run firm, and was meant to kick off a new Beijing program to introduce more private capital and innovation into big state-run firms. With this announcement of 25 partners and $17.5 billion in new investment, Sinopec certainly has achieved Beijing’s aim of injecting private money into its retail arm. But by choosing so many partners and giving each such a small stake, Sinopec is effectively diluting each of its new partners’ voice in the new joint venture to little or nothing.

It’s hard to say why Sinopec is taking this tactic, which will achieve Beijing’s goal of bringing private money into the company but will introduce little or none of the innovation and entrepreneurial spirit from private firms like Tencent and Fosun. Sinopec fans might say the $17.5 billion figure was so large that the only way to raise so much money was by signing agreements with such a wide field of partners. But surely Sinopec could have raised the money with a much smaller group of partners, perhaps 5 or 6 instead of the final 25.

I’m a bit more cynical, and would say Sinopec’s move was designed to execute Beijing’s plan in reality without actually executing it in spirit. That’s to say that Sinopec has now achieved Beijing’s goal of injecting big private money into its retail unit. But at the same time, it has given its new partners such small stakes that all will almost certainly remain as passive investors and have little or no voice in the running of Sinopec Sales. That means that at the end of the day, we can probably expect to see little or no change at Sinopec Sales as a result of this major new stake sale.

Bottom line: Sinopec’s selection of 25 partners to buy tiny stakes in its retail unit means that none of those investorss will have any voice in the running of Sinopec Sales, which will continue to be dominated by Sinopec.

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