On May 11th, China Three Gorges (CTG) initiated a €9 billion take-over bid for the Portuguese utility company, Energias de Portugal (EDP). The Chinese state enterprise, which already owns 23% of EDP, offered shareholders a premium of just 5% below the closing price. While EDP rebuffed the bid, analysts believe that CTG is unlikely to give up on its quest for a controlling stake in the company.
EDP is Portugal’s largest company by assets with operations across Europe, North America, and South America. The company generates, supplies and distributes electricity and has also expanded into the gas and renewable energy industries. Although a commercial giant in Portugal with market capitalization hovering around €12.4 billion, the company has a net debt of €13. 8 billion, making it vulnerable to a take-over. Indeed, rumors have abounded that Spain’s Gas Natural Fenosa and ENGIE in France have also considered a possible counter bid for the company.
What makes EDP such an attractive target for a take-over? European utility firms are on the hunt to expand their renewable energy ventures and these assets make up a significant chunk of EDP’s operations. Moreover, with businesses in 14 countries, the company offers the opportunity for other firms to expand their market size. In the case of China, EDP would provide the company with access to renewable energy technology that could be deployed at home.
CTG is in a particularly strong position to persist in its bid for EDP. Along with a positive and growing cash flow, the company can also rely on additional funding from the China Development Bank. In consideration of EDP’s strategic assets and CTG’s financial firepower, it is almost certain that the Chinese company will eventually up its bid.
From Portugal’s perspective, CTG’s bid is a welcome development. Portuguese Prime Minister, António Costa, has gone on the record to state that he has no concerns over CTG’s bid and remarked that Chinese enterprises have been “good investors in Portugal”. The fact that CTG has promised to maintain EDP’s headquarters in Lisbon is viewed in an especially positive light by Portuguese policymakers.
It’s worth noting that Portugal has stood out amongst its European peers in its approach to Chinese investment. Since the financial crisis, China has become an important source of foreign direct investment in Portugal, having invested in major companies such as TAP Air Portugal and Redes Energéticas Nacionais. Furthermore, last year Portugal introduced a legal amendment that reduced some of the limitations previously placed on foreign take-overs. While Prime Minister Costa has said that this decision was unconnected with the then-uninitiated bid by CTG, he did admit that the law had been changed in order to “offer the same conditions to foreigners, namely, Chinese, as Europeans”.
In contrast, Chinese investment has been viewed more suspiciously by other EU states. For instance, at the end of May, the European Parliament’s (EP) International Trade Committee voted in favour of extending the EU’s scrutiny of foreign take-overs. Most commentators believe that China was the impetus behind this initiative.
Pushback has already begun against CTG’s proposed take-over of EDP. The Spanish Energy Minister has warned CTG that it will confront a “regulatory wasp nest”. With operations across so many countries, CTG may find itself forced to divest some of EDP’s assets in order to gain approval for its take-over. EDP has the third-largest installed wind capacity in the US and given the current political climate it is probable that US regulators will take a critical view of CTG’s bid.
EDP’s shares have risen since CTG’s initial bid was rejected. This suggests that shareholders expect a new offer will be made. While other EU member states may be hesitant to see China gain a controlling stake in a European utility, there are advantages for both Portugal and EDP. A take-over by other European utility companies would probably result in job cuts and even a break-up of EDP. In this light, it is easy to understand why the Portuguese government is looking favourably on CTG’s ambitions.