A $5 billion-plus investment by China’s state power grid into Australian electricity and gas assets is set to test the country’s receptiveness to Chinese government-backed takeovers and could pave the way for larger acquisitions.
State Grid Corporation of China , the world’s biggest utility, said on Friday it would take a 19.99 per cent stake in Singapore Power’s listed SP AusNet for $824 million, and 60 per cent of its unlisted Jemena assets.
The Jemena portfolio, which includes a chunk of Victoria’s power and NSW’s gas grids, was valued at $9 billion in its most recent accounts, signalling the deal is worth more than $5 billion in total, including debt.
The transactions, revealed early Friday on afr.com and confirmed later by the companies, are subject to approval by the Foreign Investment Review Board and China’s National Development and Reform Commission. Initial talks have already taken place.
Attraction of Australian assets
FIRB approval is likely to be the most sensitive, given State Grid would get control over part of Melbourne’s electricity network and of the NSW gas distribution grid, as well as of the main gas pipeline from the Bass Strait to Sydney,
State Grid wants to invest up to $US50 billion by 2020 in overseas assets, building them up to account for up to 10 per cent of its business, general manager Liu Zhenya said in January.
Assets in Australia are attractive because of the relatively stable regulatory framework and their returns.
“They do the capacity to put sizable money in a business which they think is attractive,” said Sajal Kishore, Fitch Ratings’ utilities director in Sydney.
“The regulatory framework is quite good, especially if you compare it to what’s around in Asia.”
Lazard and Credit Suisse are advising Singapore Power. Macquarie Capital and Goldman Sachs are advising State Grid, whose networks cover about 88 per cent of China and yield revenues of about $US300 billion ($305 billion).
Singapore Power’s stake in SP AusNet will fall from 51 per cent to 31.1 per cent, and in Jemena to 40 per cent. The 49 per cent of SP AusNet that is publicly listed will be unaffected.
The investment is State Grid’s second within a few months in Australia. It bought a 40 per cent interest in South Australia’s ElectraNet network late last year for $500 million. It is also thought to be on the shortlist to buy a stake in New Zealand distributor Powerco.
The acquisitions mark a new stage of maturity in China’s offshore investments beyond deals to secure access to natural resources, said Graeme Browning , head of transactions at Ernst & Young in Australia.
“It’s not just to secure supply, now it’s to invest in assets that are likely to give them a recurring revenue stream of foreign reserves,” Mr Browning said.
He said the acquisitions may also act as a “stepping stone” for State Grid to learn more about the Australian market ahead of the potential privatisation of the “poles and wires” assets in Queensland and NSW.
FIRB approval will be sensitive but any concerns should be lessened by the fact the assets are passing from one Asian state corporation to another.
“It’s one sovereign to another sovereign: In theory it should go through,” Mr Kishore said.
Victorian Energy Minister Nicholas Kotsiras said the government welcomed foreign investment, which has played an “important role” in the economic development of the state.
“This shows confidence in investing in Victoria,” Mr Kotsiras said.
Singapore Power was known to have run a sales process last year for Jemena, part of the Alinta Energy business it and Babcock & Brown bought in 2007 at the top of the market for $8 billion in cash and scrip. The partners later divided up the assets.
Singapore Power chief executive Wong Kim Yin said the link-up with State Grid would “further enhance” both SP AusNet and Jemena.
Cheng Mengrong, co-chair of international co-operation at State Grid, said the planned investments “represent important strategic additions” to the group’s global portfolio. She said no significant change would be made to the operations or management.
For its interest in SP AusNet, State Grid is paying a maximum of $1.23 per share, a discount of about 3.5 per cent to Thursday’s close. SP AusNet shares still gained 1.6 per cent on Friday to $1.295.
SP AusNet said its board and management were reviewing the implications of the deal.
With Anthony Macdonald and Lucille Keen.