By Ben Dummett
China Three Gorges Corp. late Friday said it plans to launch a EUR9.07 billion ($10.8 billion) offer to acquire the almost 77% it doesn't already own of Portugal's main energy utility, a bold move to expand further into Europe's power sector that will likely attract heavy scrutiny from the U.S. and other governments in the West.
By consolidating its ownership of Energias de Portugal SA, or EDP, China Three Gorges, or CTG, would gain full control of Portugal's largest electricity producer, distributor and supplier. But it also would offer the Chinese state-owned energy company a bigger platform to gain exposure to EDP's power operations in several other countries in Europe, including Spain, France, Italy and the U.K. In the Americas, the Lisbon-based company is present in Brazil, Mexico and in the U.S., where it operates wind farms across much of that country.
As one of the world's largest sources of greenhouse gases, China has aggressively pushed the construction of solar panels, wind farms and other alternative energy sources, while adopting policies designed to drive the purchase of electric vehicles in a bid to reduce pollution. CTG's interest in acquiring EDP underscores that effort.
Last year, EDP generated operating profit of about EUR1.1 billion, of which about 40% originated from wind and other types of alternative energy.
CTG was formed in 1993 to oversee the construction and operation of the Three Gorges Dam, the world's largest hydropower plant, on the Yangtze River. It first acquired a minority stake in EDP in 2011 and even then saw the investment as a way to open doors to the European utility's hydroelectric plants in Brazil and its two million customers there.
CTG said it is offering EUR3.26 in cash for each EDP share it doesn't own, or a 5% premium to EDP's share price Friday, for a total of almost $11 billion. At that price, the deal would represent one of the biggest foreign acquisitions by a Chinese company since the $43 billion takeover last year of Swiss agro-giant Syngenta AG by China National Chemical Corp.
The premium relative to share price is relatively low. That said, winning the minimum support of shareholders holding shares representing 50% plus of the votes is helped by CTG's being able to count its shares toward hitting that threshold to carry out the bid. The premium is a more attractive 17.9% over the adjusted six-month volume weighted average share price of EDP.
Still the biggest challenge CTG could face in completing the deal may come from regulators in the U.S. and the European Union, which need to approve the proposal and are more closely scrutinizing acquisitions by foreigners of assets in sectors such as energy infrastructure, defense, technology and telecommunications to guard against security breaches.
The Committee on Foreign Investment in the U.S., a multiagency panel tasked with screening foreign investments on national-security grounds, is required to rule on the proposed deal since EDP operates wind farms in that country. The U.S. government has blocked a number of Asian-led deals on CFIUS's recommendation, most recently in March when President Donald Trump rejected an attempt by then Singapore-based Broadcom Ltd. to acquire rival chip maker Qualcomm Inc. for $117 billion.
A simmering trade war between China and the U.S. could also complicate matters for CTG in winning regulatory approval in the U.S.
Other required approvals include the Portuguese government and either Portugal's antitrust regulator or the European Commission, the EU's executive body.
CTG has tried to ease any concerns that the Portuguese may have about losing control of the country's main utility. "We are...committed to preserving EDP's Portuguese identity, with headquarters in Lisbon...as well as [maintaining] the highest standards of corporate governance," Lu Chun, CTG's chairman said in a statement.
Chinese ownership of major energy infrastructure isn't new in Europe. China Investment Corp. owns a stake in the U.K. gas-distribution business of National Grid PLC and China General Nuclear Power Corp. is helping to finance construction of the nuclear power station at Hinkley Point in southwest England.
Still, the European Commission has signaled that it will look more closely at the purchase of energy infrastructure in Europe among other assets by foreign, state-owned companies.
"It is a political responsibility to know what is going on in own backyard so that we can protect our collective security if needed," European Commission President Jean-Claude Juncker said in September.
Michael Wright in London contributed to this article.