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Shell divests Tongyi stake

In the third quarter issue, we published an article on Shell’s strategic decision to shift its global lubricants’ business focus to China. Soon after, Shell announced that it has sold its 75% stake in Tongyi Lubricants, which it bought from Huo’s Group in 2006, to Huo’s Group and The Carlyle Group. Shell had hired China International Capital Corp. to sell its stake.

Shell Chief Executive Ben van Beurden, who took over in January, had laid out plans to sell USD 15 billion of assets by the end of 2015 to raise cash and boost returns amid declining crude oil prices.

The sale was expected to fetch USD 500 million, but could have fetched as much as USD 620 million after private equity firm Blackstone Group and SK Lubricants were said to also be in the running. The final sale price, considered commercially sensitive, was not disclosed.

“The sale is consistent with Shell’s strategy to concentrate its downstream footprint on a smaller number of assets
and markets where it can be most competitive,” Shell said in a statement.

After the sale, Carlyle will own the majority stake in Tongyi, according to Carlyle spokesperson Tammy Li. Shell announced in early November 2015 that the transaction was completed.

Tongyi Lubricants, whose brand name is Monarch, is said to be the largest private domestic lubricant brand in China. The brand has a market share of 4-5%, according to Huo’s Group spokesperson Phil Yue. While Shell’s focus is in top-tier lubricant products, Tongyi’s focus is in the mid-tier, “targeting the mass and emerging market.”

Huo Zhenxiang 霍振祥
Huo Zhenxiang 霍振祥

“Since I created this lubricant brand in 1993, with everybody’s great effort, Tongyi has become the No. 1 domestic private brand company in China’s lubricants industry,” said Huo’s Group Chairman Huo Zhenxiang in a statement. “These underpin the success of Tongyi and the company has experienced continuous profitable growth in recent years.”

“By working together in partnership and cooperation, Shell and Huo’s Group have built Tongyi [into] a strong brand with improved profitability and value proposition to customers in China,” said Xinsheng Zhang, executive chairman of Shell Companies in China.

After Shell bought the Tongyi stake, it introduced an international management system. The company has improved its health, safety, security and environment (HSSE) performance significantly over the years, Shell spokesperson Steel Shen added.
Tongyi has developed an extensive distributor network in China and the Monarch brand has become a household name, the company said. Tongyi has three lube blending plants in China located in Beijing; Xianyang, Shaanxi province; and, Wuxi, Jiangsu province, with a total capacity of 600,000 tonnes per annum.

“Both the Tongyi-branded and the Shell-branded lubricants have contributed to the growth of Shell’s
lubricants business in China,” which is now the leading international lubricant supplier in the country, Shen said. After the sale, Shell is left with five lube blending plants located in Zhapu, Hong Kong, Zhuhai and two plants in Tianjin. It also has a grease manufacturing plant in Zhuhai.

Shell’s combined lube blending capacity after the Tongyi sale is more than one billion litres. Asked what Shell’s market share would be after the divestiture, Shen said that, “We do not make forward looking statements.”

Shell’s current focus is optimising its lubricants portfolio and strengthening the Shell lubricants brands, the company said.

Today, China is the largest lubricant market in the world and represents 44% of the Asian market. Kline & Co. estimates compounded annual growth rate in China at 1.9% in the 2014-2024 period, compared to less than 1.0% globally.

Huo’s Group, headquartered in Beijing, as established in 1983. It operates three main businesses: energy efficiency and renewable industry, modern warehouse and logistics, and financial services. The group has more than 1,000 employees across China.

The Carlyle Group, a global alternative asset manager with USD 193 billion of assets under management across 128 funds, has more than 1,700 employees in 35 offices across six continents. Carlyle’s equity investment for the transaction will come from Carlyle Asia Partners IV (CAP IV). Launched in 2008, this fund invests in private high growth companies with outstanding local management and leading market position in China, India, Japan and Korea. International law firm Clifford Chance represented Carlyle in the transaction, while the Huo Group was advised by the Zhong Lun Law Firm headquartered in Beijing.

Tongyi Monarch Lubricants

According to Herman Chang, managing director of the Carlyle Asia buyout team, “Carlyle’s investments heavily focus on opportunities driven by the rising middle class in China. The lubricants industry is a growing market in China due to increasing auto penetration. Tongyi is well positioned to tap the market’s potential with its strong brand, extensive sales network and experienced team.”

Without giving any specifics, Carlyle added that it will work closely with Huo and the Tongyi team to bring the company’s success to the next level by “leveraging our global resources and industry expertise.”

“The lubricants industry has a bright future in China. I am very confident that our cooperation with Carlyle
will be another success story in the years to come,” said Huo.