In Portugal, trust in China is the art of the deal

LISBON, (Reuters) - Utility company EDP may balk at the meagre 5 percent premium offered for its shares by China Three Gorges (CTG) but the battle for Portugal’s biggest business has largely played out already.

To some it looks like a lowball bid, but Portugal has welcomed the offer because it considers the Chinese firm’s pledge to keep EDP-Energias de Portugal intact more important than the price and it wants closer ties with a country that has ploughed billions into its economy.

That openness to investment from China, including in strategic sectors like energy, stands out amid suspicions elsewhere in Europe about Chinese acquisitions.

The Chinese state-owned hydropower giant became EDP’s biggest shareholder in 2011. So when reports of merger talks between EDP and Spanish rival Gas Natural emerged in July 2017, it beat a path to the Lisbon government’s door.

A Gas Natural takeover would have threatened CTG’s ambition to use EDP to diversify beyond China, while Portugal’s Socialist government feared a European rival could break up the business, an industry source familiar with the talks and a political source with knowledge of the government’s position said.

“Nearly a year ago, Gas Natural approached EDP and that was the time when CTG started to think about this move,” said one industry source with knowledge of CTG’s takeover bid.

“If CTG has been a partner for more than six years, has invested in the company, in a strategic sector for Portugal, and has good relations with the government, it is natural that they talk,” the source said.

EDP and Gas Natural denied being in talks last year. But just over a month after the reports, Portugal added a clause to its takeover laws allowing shareholders with the same ultimate owner to combine all their voting rights.

Previously, the votes would have been capped at 25 percent, whatever the size of their combined holdings.

That could be crucial as CTG’s bid for EDP progresses. While it owns 23.3 percent, another Chinese stateowned company, CNIC, holds 5 percent, most recently buying 2 percent at the end of 2017.

CTG in China and a spokesman for the Portuguese government did not respond to requests for comment.

CTG first bought 21.4 percent of EDP in December 2011 for 2.7 billion euros ($3.2 billion), stepping in when Portugal privatised the company to raise funds after an international bailout to stabilise government finances.

The Chinese company has since invested some 2 billion euros in power ventures with EDP, which has a portfolio of renewable energy assets such as wind, hydro and solar power in countries such as Brazil, the United States, France, Italy and Poland.

In April this year, there were reports of interest in EDP from another European utility, this time Engie. The French company declined to comment while EDP said at the time that no contacts had been established.

A few weeks later, CTG launched its takeover bid. It offered 9.07 billion euros ($10.7 billion) for the rest of EDP on May 11, a premium of just 5 percent above the utility company’s share price before the offer became public.

EDP described the offer as too low, but left the door open to negotiations. Some analysts expect EDP to ask for a 20 to 30 percent premium but no other bidder has yet emerged and EDP shares are trading less than 5 percent above the offer price.

“It was predictable and there have already been conversations with the government for a long time,” said an industry source close to EDP who has knowledge of the talks.

“This is purely political,” the source said. “CTG knew that there were many European companies looking at EDP, which is medium-sized and has interesting assets.”

In its bid announcement, CTG made clear it saw EDP’s long-term future as a Portuguese company strengthened by CTG’s assets, with a large free float of shares that could potentially be used as a springboard for European expansion.