By TOM ORLIK And DUNCAN MAVIN China Gas Holdings has received an offer it will find it hard to refuse. The Hong Kong-listed natural gas distributor is the subject of a $2.15 billion hostile takeover bid from state-owned Sinopec and ENN Energy, another distributor. The logic for Sinopec is clear. China plans to ramp up consumption of natural gas, and Sinopec has already agreed to buy most of the output from a $20 billion Australian project. China Gas's network would support Sinopec's efforts to pipe that gas into homes across the mainland. But the logic for shareholders in China Gas is less clear cut. At a premium of 25% over the distributor's market value, the bid seems juicy. But the stock has been struggling since last year when two senior executives, including managing director Liu Minghui, were arrested by Chinese police on allegations of embezzlement. In fact, the Sinopec-ENN bid looks opportunistic, valuing the company's shares at no premium to its historical average price of about 14 times forward earnings. Saying "no" to China's major refiner however, will be easier said than done. For starters, the usual defenses against a hostile bid will not be easily available. Which brave company would be China Gas's "white knight"—willing to launch a bid to counter a state-owned giant? Shareholders might also be concerned about the consequences of blocking Sinopec's advances outright. The prices for the gas China Gas buys and sells are both controlled by the government—essentially, Beijing controls whether it operates at a profit or a loss. The deal could hinge on China Gas's biggest shareholder—Mr. Liu, who owns 13% of the stock according to Capital IQ, and who is currently under house arrest in the southern Chinese city of Shenzhen. Bankers on both sides of the potential deal are surely beating a path to his locked door. Whether he decides to hold out for a better offer or side with the state-owned company remains to be seen.. Write to Tom Orlik at Thomas.orlik@wsj.com and Duncan Mavin at duncan.mavin@wsj.com

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