-- Wei Gu and Alexander Smith are Reuters columnists. The opinions expressed are their own --
By Wei Gu and Alexander Smith
HONG KONG/LONDON, June 25 (Reuters) - China desperately needs an overseas deal after numerous false starts. So too does Sinopec, whose proposed acquisition of oil explorer Addax Petroleum would be China's biggest overseas purchase to date.
If the $7.24 billion deal goes through, it will be presented as a major coup for Beijing -- which is scouring the globe in its attempts to secure oil supply -- and for the oil refiner, which needs more upstream exposure to compete at home.
But while the purchase underscores China's determination to expand in the resources market, Sinopec's Addax adventure also risks sending the wrong message to potential sellers of resource-based companies -- that China Inc is willing to pay over the odds to get what it wants.
China's Sinopec was up against rival Korea National Oil Co. in the bidding for Addax and won with an offer worth more than four times the Toronto listed stock's November low and a 47 percent premium to the Addax share price before it announced it was in talks.
So it is crucial that Sinopec explains why the deal makes strategic and financial sense. Otherwise, it risks giving the impression it was willing to land a deal at any cost, just to impress Beijing.
There is some logic behind the deal. Buying Addax will give the Chinese group the upstream assets it desperately needs. Its listed entity, Sinopec Corp., has lagged behind China's two other domestic energy giants because of its disproportionately small resource base.
Sinopec's oil and gas reserves are less than one-fifth of its sibling PetroChina's, making it vulnerable to rising oil prices. This cost it dearly last year when it had to keep domestic fuel prices at about 40 percent below the U.S. price to contain domestic inflation. Sinopec's refining business lost almost $17 billion as a result.
It is only recently that Sinopec has been allowed to pursue overseas oil and gas projects, as Beijing wants to take advantage of lower oil prices to build strategic stockpiles.
Sinopec's big advantage in buying such assets is that Chinese banks are willing to provide low-interest, long-term loans to a fellow state-owned company.
That is just as well for Sinopec, which is forking out $7.24 billion in cash for Addax. At only a tenth of Sinopec's equity value, the deal has been cheered by local analysts.
But as Middle Eastern investors have found to their cost when diversifying abroad, just being seen as an interested party with deep pockets tends to drive up prices.
China must ensure Sinopec proves Addax really is worth what the oil group is paying for it. Failure to do so will cost both company and state considerably more in the long run.
-- At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns, Reuters' customers can click on --
(Editing by David Evans)