••• BY HEATHER JOHNSTONE •••
The People’s Republic of China continues to be a market that many western businesses want to conquer. However, are we seeing a change in the air as a growing number of Chinese companies appear to be looking to invest outside of their domestic power market, and more specifically in the West?
At the end of July we finally saw EDF, France’s state-owned electric utility, off-load its UK electricity distribution network business, It had been up for sale, with a price tag of £4 billion ($6.4 billion), since late last year, and forms part of EDF’s efforts to cut its debt in these cash-strapped times.
What is especially interesting about the deal is that the new owner is a Chinese consortium led by Cheung Kong Infrastructure (CKI). CKI, which is based in Hong Kong and controlled by the billionaire Li Ka-shing, also paid significantly over the asking price – according to reports in the financial media it was a generous £5.8 billion.
EDF has recently sold its UK power distribution network activities to a Chinese consortium led by CKI
This probably reflects the fact that CKI was up against stiff competition, and had to outbid Macquarie of Australia, the Abu Dhabi Investment Authority and Canada Pension Plan. It is also worth noting that this low-voltage network business does serve key UK infrastructure, including the London Underground, both Heathrow and Gatwick Airports and the Channel Tunnel.
If CKI has the desire and funds at its disposal, which many assume it does, to invest in upgrading the networks, this could prove to be a highly lucrative deal for the Hong Kong company. This was certainly the belief of the charismatic Vincent de Rivaz, EDF’s chief executive in the UK, who had opposed the sale, arguing that the networks business offered a great potential for the development of Smart Grids.
This CKI deal also raises an interesting question: Does this signal a move by Chinese companies to invest in power companies in the West?
Over the last 20–30 years the People’s Republic of China has undergone the most astonishing transformation – from a closed inward-looking rural-based Communist state into an industrial and manufacturing giant with a major foothold on the world stage. China is now the world’s second largest economy – it overtook Japan in August of this year. It was around 10–15 years ago that the West woke up to the huge potential of China and a bandwagon began to roll that saw many Western companies vying to get a slice of the market – some were successful, many others were not. Although the rush of the West into China has slowed, the country remains perhaps the world’s most important emerging market.
Reports over recent years have suggested that China’s investment environment has deteriorated, with a rise in discrimination against foreign investments and an increase in regulations that force foreign enterprises to face greater operational difficulties. Whether these accounts are true or not is hard to judge.
What I can say, however, is that there is an emerging trend for China to actively look outside its borders to do business in the power industry. Although the domestic electricity market is huge and awash with opportunities it is becoming more and more common to hear of Chinese companies being involved in power projects – both conventional and renewable energy – right across the globe. From concentrating solar power in Singapore, to hydropower plants in Ecuador, to nuclear power in South Africa. Interestingly, at a panel discussion at POWER-GEN Middle East, which took place in Qatar earlier this month, Kahramaa and the Qatar Electricity & Water Authority both expect that within the next few years there will be a shift in the Gulf away from Western contractors to those from the Far East, especially China, as their technological expertise grows.
In PricewaterhouseCooper’s recent Power Deals 2009 report, which provides an in-depth analysis of the M&A activity in the utility sector across the globe, China led the activity in Asia-Pacific, where the target value of all deals soared from $7.7 billion in 2008 to an impressive $16 billion in 2009.
Although the deals in China were almost exclusively domestic, it does provide a clear indication that unlike Europe and the US, where continued economic uncertainty means less cash is available, China has plenty of money on hand for deal-making.
In addition to the high-profile EDF deal, China Huaneng Group (GHNG), which is the country’s largest electricity generator, is allegedly in advanced talks to purchase a 50 per cent stake in InterGen, a global electric utility headquartered in the US. If the deal goes ahead, the stake will give GHNG access to power plants in Australia, Mexico, the Netherlands, the Philippines and the UK. Also it would be CHNG’s largest overseas purchase since it bought Singapore’s Tuas Power back in March 2008.
Another potential deal in the pipeline involves the State Grid Corporation of China, the nation’s largest grid operator, which is apparently awaiting approval to purchase seven Brazilian energy companies in a deal worth 3.1 billion reais ($1.8 billion). The seven, primarily power transmission companies, include Elecnor SA, Abengoa SA, Isolux Ingenieria SA and Cobra Instalacionesy Servicos.
So is China actively investing in power assets overseas and specifically in the West? Growing evidence appears to say yes.
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