Portugal’s privatisation programme is off to an auspicious start. China’s deep pockets have triumphed over politics in Lisbon’s sale of a stake in Energias de Portugal (EDP).
Three Gorges Corporation is buying 21 pct of Portugal’s main utility for a top price of 2.7 billion euros, and throwing in a bonus bundle of low-cost, long-term bank financing and investment commitments. It’s a reminder that China will press home its advantages when it spies strategic value - in this case EDP’s technology in renewable energy and its growth in Latin America. That mattered more than lobbying by Berlin for a rival bid from German energy giant E.ON.
TGC’s offer represents a 48 percent premium to EDP’s share price on Dec. 22, and a 15 percent premium to the sector on a multiple of this year’s earnings, according to Cheuvreux estimates. While this is a big price, worth 3.45 euros a share, it was only marginally ahead of the 3.25 and 3.28 euros a share offered by E.ON and by Brazil’s Eletrobras respectively, according to a person familiar with the situation.
The Chinese bid had some other aces. Three Gorges will invest 2 billion euros for minority stakes in EDP renewable energy projects until 2015, which should allow net debt to EBITDA to fall below 3 times. A Chinese bank has committed to lend EDP 2 billion euros for up to 20 years, with possibly another 2 billion euros of uncommitted funds. This takes care of EDP’s refinancing needs until 2015, and the cheaper funding could boost earnings per share by 5 percent, according to UBS estimates. By contrast, E.ON’s bid sweeteners were more industrial, including agreeing to base renewable-energy activities in Portugal, and closer cooperation in Spain.
To cap it all, China isn’t looking to control EDP. It has agreed to a four-year lock-up agreement, according to people familiar with the situation, with certain exceptions.
The deal highlights the curious dynamics of the euro zone crisis. The prospect of angering Germany - the biggest contributor to Portugal’s 78 billion euro bailout - counted for little in the face of China’s financial firepower. That should be a wake-up call to bidders in M&A situations that may attract a Chinese player with access to substantial state backing and cheap bank lending. Don’t underestimate your eastern competition.
