China's largest oil refinery Sinopec announced Monday it will privatize Sinopec Zhenhai Refining and Chemical Company Limited (ZRCC) through its wholly-owned Ningbo Yonglian.

China Petroleum and Chemical Corporation (Sinopec) and ZRCC held board meetings Saturday and approved Sinopec's privatization of ZRCC by way of "merger by absorption".

According to the merger agreement entered into between Ningbo Yonglian and ZRCC, Ningbo Yonglian will pay at 10.60 HK dollars each share in cash to the ZRCC H shareholders. The H shares will total about US$7,672 million.

This transaction will contribute to the continued development of Sinopec. It also demonstrates efforts of Sinopec management to deliver their promises at IPO which include restructuring its assets in order to strengthen competence of its core business, said a top manager with Sinopec.

From a long-term perspective, the transaction will have a positive impact on Sinopec's profitability as well as shareholder value, he said.

According to him, the proposed merger can reinforce the business value chain of ZRCC through the vertical integration of ZRCC's refining assets with the upstream refining operation of Sinopec, consolidate Sinopec's resources and realize potential synergies and enable Sinopec to improve the utilization of the capital resources by centralizing capital allocation and enhancing capital expenditure management, eliminate related party transactions and intra-group competition as well as consolidate and simplify management structure and efficiency improvement.

The price of 10.60 HK dollars is reasonable for both Sinopec Corp. and ZRCC, said Sinopec.

To the shareholders of Sinopec, the implied price-earning ratio and the EV/EBITDA multiple, a ratio used to determine the value of a company, based on the cancellation price for ZRCC is reasonable. Moreover Sinopec believes that the merger should have a positive impact on Sinopec's profitability as well as shareholder value.

The price represents a reasonable premium to the historical market price of ZRCC. It represents a premium of 12.17 percent over the closing price of 9.45 HK dollars per share on November 2, 2005. It also represents a premium of 22.93 percent and 29.91 percent over the average closing price of 8.62 per share over the last month, and the average closing price of 8.16 HK dollars per share over the last 12 months respectively. The proposal will offer them a unique opportunity to capitalize their entire investments in ZRCC, said Sinopec.

The total shares number of ZRCC is 2,524 million. Of those, Sinopec Corp. holds 1,800 million shares, accounting for 71.32 percent stakes. The public holds 724 million shares, accounting for the remaining 28.68 percent stake.

To date, the proposed merger has received the approval from the Board and the Board of Independent Directors of Sinopec and ZRCC. However, the completion of the merger will still be subject to approval by the shareholders of ZRCC at the general and independent shareholder meetings and approval from the relevant regulatory authorities, said Sinopec.

Sinopec is the first Chinese company that has been listed in Hong Kong, New York, London and Shanghai. The Company is an integrated energy and chemical company with upstream, midstream and downstream operations. Based on 2004 turnover, Sinopec Corp. is the largest listed company in China. It is also the second largest crude oil and gas producer in China.

ZRCC is a holding subsidiary of Sinopec. Listed in the Hong Kong stock exchange in 1994, the company boasts a comprehensive crude processing capacity of 18.5 million tons per year.

(Xinhua News Agency November 15, 2005)