Just a week after Internet giant Tencent's (OTCPK:TCEHY) (HKEx: 700) name emerged as an unlikely bidder for a stake in the retail business of leading oil refiner Sinopec (NYSE:SHI) (HKEx: 386), the pair have announced an unrelated tie-up to co-develop a number of Internet-related, non-energy businesses. The new partnership does seem a bit odd, as these 2 companies are about as different as they could possibly be. One is a fast-growing private company in the high-tech space, while the other is a slow-growth giant in a traditional space monopolized by state-run behemoths.
But then again, we're seeing increasing encroachment by both kinds of companies on each other's territory, in many cases made possible by Beijing reforms to encourage more private sector participation in industries previously limited to state-run monopolies. This particular new tie-up could carry additional significance, as it could indicate that Tencent may be a favored candidate for Sinopec's unrelated pending sale of up to 30 percent of its retail business unit.
All that said, let's take a closer look at this latest tie-up that will see Tencent and Sinopec jointly develop services in a number of areas, including mobile payments, online to offline services (O2O), map navigation and big data. (English article; Chinese article) Some of these areas do seem logical, since Sinopec operates a huge national network of gas stations and convenience stores that can be used as collection points for products purchased on Tencent's e-commerce services. Most Sinopec customers are also car owners who could use mapping services for driving and e-payments to pay for their gas.
We'll have to wait and see how well this partnership works, and I'll admit that I'm just a bit skeptical of the chances for success between companies with such different backgrounds. Big state-run firms like Sinopec are often very bureaucratic and slow moving, and I suspect Sinopec's main motivation for forming this tie-up is because it was ordered to seek such partnerships by Beijing. But that doesn't mean it will really try to make the partnership succeed.
Word of this partnership comes just a week after media reported that Tencent was one of the finalists in bidding for up to 30 percent of Sinopec's retail business, alongside other companies including Fosun International (HKEx: 656) and Canada'sAlimentation Couche-Tard (Toronto: ATDb). (previous post) That sale, which is expected to fetch up to $16 billion, is also part of Beijing's pilot program to inject more private money and innovation into big state-run companies like Sinopec.
According to the latest reports, Tencent is just one of 37 companies that have made the final cut to purchase the 30 percent stake in Sinopec's retail unit, known as Sinopec Sales. Sinopec's chairman gave the update at a media briefing this week, and said the list will be narrowed further before a final winner is expected to be announced by the end of this year. (English article)
Sinopec Chairman Fu Chengyu didn't disclose any other finalist names in his remarks, but the large number reflects the fact that there's quite a bit of interest in the unit. It will be interesting to see what kind of company Sinopec ultimately chooses, as the limited list we've seen so far seems to include 3 types: pure investors like Fosun; strategic partners from the energy sector; and companies from unrelated sectors like Tencent, which could benefit from Sinopec's huge retail network of 30,000 gas stations and 23,000 convenience stores.
This latest deal with Tencent seems to indicate that the company could become a finalist and might even win the bidding for the 30 percent stake in Sinopec Sales. But if I were betting, I would say the final winner is more likely to be an investment company with at least some government ties. Sinopec would feel far more comfortable with such a partner that has a similar background with its own. That probably won't make Beijing very happy. But then again, reforms never happen very quickly in China.
Bottom line: Tencent's new tie-up with Sinopec is likely to face difficulties due to clashing cultures, which will also hurt its chances of being selected to buy a stake in Sinopec's retail unit.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.