FTO.L Regulatory News (FTO)

8.00am 17 December 2012

FORTUNE OIL PLC

("Fortune Oil" or the "Company")

Proposed disposal of Fortune Oil's Natural Gas Business

Fortune Oil (LSE: FTO.L) focuses on oil, natural gas and resource supply operations and investments, primarily in China. Fortune Oil is listed on the Main Market of the London Stock Exchange.

Highlights:

l Injection of Fortune Oil's natural gas business into China Gas Holdings Limited ("China Gas") one of the largest gas companies in China

l Total consideration of US$400m for Fortune Gas Investment Holdings Limited ("FGIH")

l Strengthens Fortune Oil's strategic investment in China Gas

l Combining the strengths of our management and employees to ensure the future success of the combined natural gas businesses

Fortune Oil is pleased to announce that it has conditionally agreed to inject its natural gas business (the "Natural Gas Business") into China Gas, for a total consideration of US$400 million (the "Proposed Transaction"). The Proposed Transaction is conditional, inter alia, on approval by Fortune Oil shareholders ("Shareholders") and China Gas shareholders; on the consent or waiver being obtained from the facility agent on behalf of the majority of lenders from the Fortune Oil group's medium term lending syndicate; as well as on receipt of regulatory approval from the Anti-Monopoly Bureau of the Ministry of Commerce of the Peoples' Republic of China ("PRC") and on negative confirmation from the Hong Kong Takeovers Executive or Takeovers and Mergers Panel. 

China Gas is a natural gas services operator listed on the main board of The Hong Kong Stock Exchange with a market capitalisation of circa US$3.6 billion. It engages principally in the investment, operation and management of city gas pipeline infrastructure, distribution of natural gas and liquid petroleum gas ("LPG") to residential, commercial and industrial users, construction and operation of oil stations and gas stations, and development and application of natural gas and LPG related technologies in the PRC.

Reasons for the Proposed Transaction

Fortune Oil's strategy has been to focus on operations in the oil and natural gas supply sector together with investments in infrastructure projects in the PRC to capitalise on the country's increasing demand for energy and resources. The Company's Natural Gas Business has therefore built a portfolio of natural gas supply assets in the PRC together with an upstream coal bed methane exploration project (the "CBM Project").

The Natural Gas Business and China Gas' gas assets are complementary to one another and the Board believes that a unique opportunity exists for the Company and its associates to become one of the largest shareholders in and be involved in the management of China Gas. The Company intends to be a long term shareholder in China Gas so as to benefit from the potential growth in this sector in the PRC over the medium term. The Board believes that the combination of the Natural Gas Business with China Gas will create an enhanced gas supply platform better able to benefit from the PRC's growing energy demands and favourable political environment with the opportunity to create additional value for Shareholders through the Company's sizeable stake in China Gas which will increase further should the Deferred Consideration be paid in China Gas shares. 

The Board believes that the terms of the Proposed Transaction fairly values, and takes into account the risk associated with, the Natural Gas Business.

Information on the Natural Gas Business

The Natural Gas Business includes a coal bed methane block in Shanxi Province, gas pipeline infrastructure covering 3 major municipalities of Beijing, Tianjin and Chongqing, as well as 7 provinces including Shanxi, Henan, Hebei, Shandong, Liaoning, Jilin and Hubei. The Natural Gas Business also has CNG (compressed natural gas) and LNG (liquefied natural gas) operations with downstream retailing to end-users through its city gas companies or CNG vehicle stations such as the largest CNG station in Beijing.

The CBM Project consists of a coal bed methane exploration block in Liulin, Shanxi province, PRC in which the Company has a 25 per cent. interest, through its 50 per cent. holding of Fortune Liulin Gas Limited. The Liulin CBM block is on track for first gas sales in 2013 and construction of the field gas gathering system, the nodal compression station and the main export product trunk-line is currently underway. Further details on the CBM Project are contained in the Company's interim management statement dated 19 November 2012.

For the year ended 31 December 2011, the Natural Gas Business generated revenues of £59.0 million, profit before tax of £18.0 million and had gross assets of £168.8 million. The holding company for the Natural Gas Business is Fortune Gas Investment Holdings Limited ("FGIH"), and the Proposed Transaction is being effected through the transfer by the Company's 100 per cent. owned subsidiary, Fortune Oil PRC Holdings Limited ("FOPRC") of its entire equity interest (85 per cent.) in FGIH for gross consideration totalling US$340m. The Company has agreed to guarantee the obligations of FOPRC under the Proposed Transaction.

Wilmar International Limited, the 15% shareholder of FGIH, will also be transfering all of its stake in FGIH to China Gas on substantially the same terms as the Proposed Transaction.

Financial information on  Natural Gas Business

The above figures of Natural Gas Business are after exclusion of the figures of a subsidiary, to be disposed of by Fortune Gas before Completion, which has an insignificant impact on the figures.

Details of the Proposed Transaction

The total consideration for the Proposed Transaction is US$200 million in cash on completion of the Proposed Transaction and a further US$200 million as Deferred Consideration.

Under the Deferred Consideration, the Company may elect to request China Gas to replace its entitlement to Deferred Consideration in a maximum number of 250,000,000 shares in China Gas, based on a benchmark share price (the "Benchmark Price") referenced to the average China Gas share price for the 30 consecutive trading days prior to the request made by the Company between 1 November 2013 and 31 December 2013. The issue of China Gas shares under the Deferred Consideration is subject to approval of the China Gas board and the listing permission from the Hong Kong Stock Exchange.

To the extent that the maximum number of shares at the Benchmark Price is worth less than US$200 million, any shortfall will be paid by China Gas in cash. In addition, the Deferred Consideration contains an accrued interest element at a 6 per cent. annual interest rate, accruing from the date of completion of the Proposed Transaction up to and including the date of payment of the Deferred Consideration provided that no shares are issued in satisfaction of all or part of the Deferred Consideration.

As part of the Proposed Transaction, the Company has the right to nominate two directors to China Gas' board, including one executive director and the managing director.

The Company will compensate China Gas on a dollar for dollar basis where the net profits for the Natural Gas Business for FY2013 are less than HK$200 million (approximately £16.0million) or are less than HK$400 million (approximately £31.9million) in 2014. This compensation agreement is not subject to any cap. The Board expects that the required profit hurdles will be met.

Banking waiver approval process

FOPRC is the borrower under a US$180 million facility agreement (the "Facility"). The Facility requires, amongst other things, that FOPRC may not enter a transaction to sell, transfer or otherwise assign, deal with or dispose of all or any material party of its business, asset, shares in any subsidiary (direct or indirectly held) or investments. A breach of this covenant under the Facility entitles the facility agent of the loan facility, if directed by lenders holding more than two thirds of outstanding loans, to declare an event of default and accelerate the repayment of the Facility. As mentioned above, the Proposed Transaction is conditional upon necessary consent or waivers being obtained from the facility agent (on the direction of the same majority of lenders). 

As at the date of this announcement, the Company has been informed that the facility agent has received waiver letters in relation to the Proposed Transaction in excess of 50 per cent. of outstanding loans. The Board is therefore confident that sufficient waivers will be received in due course.

Under the terms of the proposed waiver, the Company expects to pre-pay 10 per cent. of the principal amount of the Facility upon completion of the Proposed Transaction and to pay a consent fee of 0.3 per cent. of the outstanding commitment from each lender.

Financial Effects of the Proposed Transaction and Use of Proceeds

The net proceeds of the initial cash payment on completion of the Proposed Transaction are expected to be approximately US$193.5 million (approximately £120.9 million). These net proceeds are stated after deduction of transaction expenses of approximately US$6.5 million (approximately £4.1 million). Prior to any reinvestment or return to Shareholders, the Proposed Transaction is expected to be dilutive to underlying earnings (1).

The proceeds arising from the Proposed Transaction will be used to reduce the Continuing Group's net debt by partially repaying the Facility.

The Board believes that following completion of the Proposed Transaction, the Company will have a strengthened financial position and will look for energy-related investment opportunities. However, Fortune Oil will only do this within strict financial criteria and where an acquisition or investment would add value for Shareholders.

Circular and approval by Fortune Oil shareholders

Owing to its size and nature, the Proposed Transaction constitutes a Class 1 Transaction and therefore it is a requirement of the UK Listing Rules that a circular be sent to Shareholders and that the Proposed Transaction is subject to the prior approval of Shareholders. The Company will be sending a circular to Shareholders in relation to the Proposed Transaction in due course (the "Circular") and will confirm the details of the timing of the General Meeting to approve the Proposed Transaction at that time.

Recommendation

The Board considers that the Proposed Transaction is in the best interests of the Company and Shareholders as a whole and unanimously recommends that Shareholders vote in favour of the Proposed Transaction. The Directors intend to vote in favour of the Proposed Transaction in respect of their own beneficial shareholdings amounting, in aggregate, to 752,297,637 ordinary shares, representing approximately 37.85 per cent. of the issued share capital of the Company.

Tee Kiam Poon, Chief Executive of Fortune Oil said:

"This transaction allows Fortune Oil to create one of the largest natural gas operators in China and together further develop the China natural gas business underpinning the Chinese government commitment to growing significantly China's natural gas consumption. We believe there are synergistic benefits from combining the two companies - enlarging the natural gas operations to 200 cities, connecting upstream, mid-stream and downstream businesses, expanding the business scope from city gas to LNG as a transportation fuel, and, most importantly, the stability of our management and employees is also key to ensure the future success of the combined natural gas businesses. After the completion of the transaction, Fortune Oil will continue to have access, through its shareholding in China Gas, into the fastest growing natural gas market in the world with an even larger platform and together we aim to accelerate China Gas's share of the China natural gas market.

We are also very pleased that this transaction provides third party validation of the value within the Fortune Oil Group."

For further information please contact:

Notes

1. This statement does not constitute a profit forecast

2. Shareholders should read the whole of the Circular to be sent to them and not just rely on the summarised information set out in this announcement.

Background on Fortune Oil

Fortune Oil is a leading independent energy company engaged in the investment and operations of oil and natural gas supply projects in the PRC. Fortune Oil has acquired a unique portfolio of high quality oil and natural gas projects across the country and has formed a strong partnership with domestic and international market leaders. Fortune Oil recently started an expansion outside the PRC securing resource projects. Fortune Oil is listed on the Main Market of the London Stock Exchange with its operational headquarters in Hong Kong.