China’s State Grid eyes Powerco stake
GIVEN THE sensitivity around Chinese investment, a landmark deal due to be finalised this month has attracted surprisingly little political noise.
China’s State Grid, the world’s largest utility by assets, is buying a 41 per cent stake in South Australian transmission network ElectraNet while it is also reported to be running a ruler over New Zealand gas and electricity distributor Powerco.
The ElectraNet deal, valued about A$500 million (NZ$628m), is modest in size but significant in that it marks the first investment by a Chinese firm in Australia’s electricity grid.
Meanwhile, Canadian investment giant Brookfield Infrastructure Partners is reported to be trying to flip its 42 per cent holding in Powerco, which boasts 420,000 customers and delivers about 40 per cent of gas and 20 per cent of electricity connections in New Zealand, concentrated in the central and lower North Island.
In its last full-year result, for the year to June 30, 2011, Powerco’s revenue was $364m. Late last month chairman Rick Bettle announced the company had made a net profit after tax of $40.2m in the six months to September 30, 2012, after changing its balance date. He also announced Powerco had secured a long-term debt facility from the United States private placement market of $127m which will be used to repay bonds maturing in March 2013.
The majority 58 per cent controlling stake in New Plymouth-based Powerco is held by Queensland Investment Corporation.
State Grid is hungry – US$50 billion worth of hungry. At least, that is how much it plans to spend outside China by 2020 with Australia set to play a pivotal role in its global expansion plans.
In coming years, New South Wales, Queensland and possibly Western Australia are expected to privatise more than A$40b of poles, wires and the transmission lines which bring power from generators to homes. The Gillard government’s recent energy white paper estimates there is A$108b of state-owned electricity assets that should be sold.
While controversial, the privatisation is an inevitable next step in the rush to bolster state government coffers by selling off infrastructure assets such as ports and airports.
It may not be the sexiest sector on the block but the stakes are high in the electricity space and the emergence of a powerful Chinese player is a game-changer for the superannuation and pension funds which have term predictable cashflows and offer solid returns.
The sale of the stake in ElectraNet by Queensland network owner Powerlink was a beachhead into Australia for State Grid, which is understood to be eyeing far larger deals.
Barclays-advised State Grid set about handling its entry into the Australian market in a nonconfrontational manner. Politicians and the Foreign Investment Review Board were courted quietly. The deal was also structurally a safe debut into the local market as it did not involve taking full ownership or a controlling stake.
In that sense, Powerco offers a similar opportunity.
However, analysts say that while power prices are a big political issue, the sale of the infrastructure that moves electricity around should not be as sensitive as buying minerals and food supplies for export.
The price State Grid paid for ElectraNet was attractive but not as high as valuations of recent deals. An A$500m price tag implies an earnings multiple of 9.4 times compared with the average of recent Australian and New Zealand infrastructure deals of about 11 times earnings, sources say.
State Grid was competing with AMP Capital Investors in the process. Analysts said foreign investors have an advantage as they are taxed at a lower withholding tax rate of 15 per cent compared with 30 per cent for a local bidder.
Electricity transmission assets offer stable, long-term steady cashflows in a monopoly situation and make sound investments if a bidder’s investment hurdles are lower than the rate of return.
In its closely-regulated home market, State Grid services 1 billion customers and wants to develop and bring new technology used in high-voltage long-distance powerlines to other markets.
It has been on a shopping spree in Brazil, Portugal and the Philippines in recent years and has a record of owning both minority stakes and taking full ownership. State Grid acquired A$500m of transmission assets in Brazil in May and bought 25 per cent of Portugal’s electricity grid in February.
Like the pension funds keen to invest in infrastructure assets, State Grid says it is a long-term investor and not just looking to turn a quick buck. The ElectraNet assets are 10 years into a 200-year lease over that network and also expected to expand its wind and renewable energy operations.