Wind is key in Chinese giant's €9bn bid for EDP

Portuguese utility EDP has been the subject of takeover speculation for the last year.

However, when a solid contender to acquire EDP emerged last week, it came from a company with which EDP is very familiar.

State-owned power company China Three Gorges last week made an offer to buy the 77% of EDP’s shares it doesn’t own for €3.26 per share, in a €9.1bn deal. This would value EDP at an enterprise value of €28.2bn, making it China’s second-biggest overseas acquisition.

CTG has been EDP’s largest individual shareholder since 2011. The company bought a 21.35% stake seven years ago from the Portuguese government, as part of a privatisation programme following the country’s financial crisis. CTG has also committed to invest €2bn in EDP-led projects, including wind farms; and, last October, it strengthened its position and increased its stake to 23.26%.

CTG has clearly had a longstanding interest in EDP, but why is it now looking to go ‘all in’? Well – and you might expect us to say this – we see wind playing a key role.

In short, the acquisition of EDP represents a unique opportunity for CTG to diversify its portfolio. In its home country, the Chinese firm primarily develops and operates hydropower plants, with a total capacity of 39GW, and it owns a wind and solar portfolio of 2.8GW.

Overseas, CTG has so far invested $17bn on 16GW of capacity in ten countries, with a particular focus on Brazil, Pakistan and Europe. Buying EDP would give CTG a solid platform to diversify its portfolio with a focus on the renewable energy sector including wind, and in particular in North America.

EDP ended 2017 with 27GW of installed capacity of all energy types, 10GW of which come from wind and solar. In particular, EDP Renewables, which manages EDP’s wind and solar portfolio in Europe, North America and Brazil, is the third-largest wind farm operator by installed capacity in the US with a 5.2GW portfolio. This would provide an excellent growth platform for CTG.

But while this looks like an exciting deal for the Chinese company, it will have to fight for it as EDP has not accepted its offer yet.

The Portuguese utility said last week that the offer from CTG was too low and undervalues the company. The €3.26 per share offer is only 4.8% higher than the utility’s closing stock price on 11th May, before the bid was announced, and EDP’s share price currently stands at €3.46, as investors are betting on a higher offer.

It will also have to fight to win approval of competition authorities in the countries in which EDP operates. The hardest consent to get would likely be from the Committee on Foreign Investment in the US, which could force EDP to sell some assets, over concerns that Chinese ownership of power generation in America threaten national security and competition.

This would not necessarily be a disaster, as CTG could use the proceedings of a potential sale to diversify its position in Latin America and to strengthen its presence in Europe, but it may be unpalatable for EDP.

One thing we do know is that money is unlikely to be an issue. CTG has the financial resources to increase its offer if it sees the value in doing so, with the backing of the Chinese government no less, which has reportedly approved its takeover plans. In addition, Chinese Foreign Minister Wang Yi said last week that China would continue to encourage investment by its companies in Portugal because of the country’s open attitude to foreign investment.

The deal has the blessing of the Portuguese Prime Minister Antonio Costa too. In his mind, an acquisition by a company from so far away would have the advantage to keep EDP operating independently, as opposed to a takeover from a European utility, which could lead to a full integration with cost cutting and job losses.

That may help to win over EDP but, with its concern about the pricing, we expect its executive board to officially reject CTG’s offer soon. Then the real negotiation starts.