State-owned China Three Gorges Corporation Initiates Bid for Controlling Stake in Strategic Portuguese Energy Operator

On May 11, state-owned China Three Gorges Corporation (CTG) announced plans for a $10.8 billion bid to acquire a 77% stake in Portugal’s primary energy utility, Energias de Portugal SA (EDP). If successful, the purchase would mark one of the largest Chinese foreign acquisitions ever and allow CTG to gain complete control of the country’s largest electricity producer, distributor and supplier. The acquisition would give the Chinese a platform in the European power sector that it has sought via other transactions, such as the stake reportedly still being pursued in Germany’s 50Hertz.  EDP operates in several European Union countries including Spain, France, Italy, and the United Kingdom as well as the Americas (Peru, Brazil, Mexico, and the United States). Three Gorges and Energias de Portugal jointly hold a concession to build the San Gaban hydropower plant in southern Peru.

As of 2011, CTG maintains a minority 23.3% stake in the operator, which was acquired when Portugal pushed through mandated privatizations resulting from its financial crisis and the accompanying bailouts by the European Union and International Monetary Fund.  Underscoring the importance attributed to the acquisition by CTG, the state-owned company made an all-cash tender offer at a 5.5% premium to EDP share prices. Sources close to the deal told the Financial Times that the Chinese company is “hopeful” it will receive political backing for the deal, based on an existing six-year partnership between the companies and CTG’s assurances to “preserve EDP’s Portuguese identity”.

Regulatory scrutiny of the deal, however, is mounting within Portugal, the European Union, and the United States. The bid also appears likely to instigate a review by the Committee on Foreign Investment in the United States (CFIUS), as EDP operates several wind farms in the United States. Clearly, there is already discomfort over the implications of such a strategic energy asset being in the hands of a foreign, state-owned entity.

CTG’s bid is part of a broader pattern of mergers and acquisition attempts undertaken by Chinese companies in the global power sector. Additionally, it contributes to a trend of Chinese investment in debt-ridden southern European companies (i.e., Greece), including the seizing of opportunities presented by debt-induced privatization effort.