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Chevron-Sinopec Deal Gets Nod from Competitive Commission

Zacks

Chevron Corporation’s CVX efforts to divest its stake in South Africa business to China Petroleum & Chemical Corp. SNP, better known as Sinopec, recently won approval from South African watchdog Competition Tribunal. The development inches Sinopec a step closer to victory over Glencore PLC GLNCY in attempts to snap up Chevron’s South African assets. Notably, in January 2018, Chevron-Sinopec deal had also been approved by South Africa’s Competition Commission.

In 2016, Chevron had stated its intention to unload 75% of its interests in South Africa assets as part of its three-year divestment goals announced in 2014. Notably, Chevron intends to offload 75% stake in its South Africa and Botswana assets including a 100,000 barrel per day oil refinery in Cape Town, a lubricants plant in Durban and a network of around 820 gas stations.

The remaining 25% interest will be owned by local shareholders. The energy supermajor also plans to jettison 220 convenience stores across South Africa and Botswana. With the divestment plans, the company focuses on balancing its global portfolio with long-term business priorities.

It will help Chevron cut costs and streamline its business models to concentrate more on the assets producing higher-margin barrels. Chevron carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, last year, many energy firms like France’s integrated oil and gas major TOTAL S.A. TOT, Sinopec, Glencore and Gunvor Group Ltd. had put in bids to acquire stakes in Chevron’s South Africa business.

Nonetheless, Sinopec — with $900 million bid — was announced as the preferred bidder on better terms and conditions it offered but the deal got stalled due to delays. Concurrently, in October 2017, Chevron’s Black Economic Empowerment partners — who own 25% stake in the South African assets — exercised pre-emption rights and Glencore swooped in with $973 million bid to replace Sinopec as the preferred bidder.

However, Sinopec was advised by the government to move forward with its regulatory proceedings associated with the acquisition. Now, with the recent approvals by Competition Commission and Competition Tribunal, Sinopec undoubtedly leads the battle, but Glencore is still not out of the race.

Notably, Sinopec has received a green signal from Competition Tribunal, subject to certain conditions. The company will be required to invest $504 million for upgrading Chevron’s refinery in Cape Town. The tribunal also ruled that the deal should not result in any job cuts. Sinopec is also expected to spend around $24 million to cover the cost of rebranding certain service stations.

Receiving a major boost by the South African authorities, Sinopec becomes the prime contender for Chevron’s South African business. Importantly, if Asia’s largest oil refiner clinches the deal, it will secure its first major refinery on the continent, keeping in line its aim to expand in the international markets.

The deal will enable Sinopec to increase its market share and revenues in the fuel retail market. Moreover, the overseas deal will help the company hedge its bets on China’s economy, as the country is witnessing declining oil demand and is shifting focus to other less-energy intensive sectors for growth.

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