Will Shell Divest its Stake in Tongyi?

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Royal Dutch Shell is considering selling its 75 percent stake in Chinese lubricant joint venture Shell Tongyi (Beijing) Petroleum Chemical Co., Dow Jones news service reported last week.

A sale would undo the international energy giants high-profile 2006 acquisition of what was then the largest independent Chinese lubricant company.

Shell declined to comment, as did Huos Group, a Beijing firm owned by Tongyis former founder, Huo Zhengxiang, which holds the other 25 percent of the joint venture.

A Dec. 10 article by Dow Jones quoted unnamed industry sources familiar with Shells effort as stating that Shell hired China International Capital Corp. to help sell its stake. The article estimated that the sale could bring U.S. $350 million to $500 million. Shell never divulged terms of its acquisition, but industry sources told Lube Report Asia that it paid approximately $100 million for its 75 percent stake.

The Dow Jones article described the effort to sell Tongyi as part of a broader Shell effort to generate cash while crude oil prices are declining, but industry observers say the energy giant has other reasons.

If they are selling it, I dont think the driver would be on the corporate asset-side, an industry consultant told Lube Report Asia on condition of anonymity. If they get $300-$500 million for it, thats not a bad bit of profit for them, and they dont really lose anything by moving away from Tongyi. But in the big scheme of things, that amount is hardly worth getting out of bed for, in terms of Shells scale.

The consultant said Shell might have a strained relationship with Huos Group and Tongyi management, or that there could be a clash of business cultures between the joint venture partners. Or, Shell may see its Tongyi business as extraneous to its mission in China. Shell has obviously built up its presence within China on its own, and it probably doesnt need Tongyi anymore.

While Tongyi provided Shell a larger geographic footprint, its reach probably isnt economically fruitful for Shell, the source noted. Tongyi provides access to [mostly inland] Tier 2, Tier 3 and Tier 4 cities, but the people in those cities didnt really have money for Western lubricants.

The Dow Jones article reported that United States-based private equity firm Blackstone L.P., in cooperation with Huo, looked to be the front-runner for acquiring Shells stake in Tongyi. Blackstone did not return calls from Lube Report Asia.

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Business    Mergers & Acquisitions