22 August 2016

Australia halts China’s investment in Ausgrid

The cash-strapped New South Wales (NSW) government has in recent years been seeking to offload its electricity assets via several transactions, with the privatisation of Ausgrid being one of those currently in the pipeline. The 50 per cent stake in the power transmission and distribution company can be valued at around AUD 10,000 million (USD 7,624 million), according to the Guardian. Proceeds from the sale will be used to reduce debt and finance infrastructure projects.

Several high-profile entities, such as sovereign funds Abu Dhabi Investment Authority and Wren House Infrastructure Management, had reportedly shown interest in Ausgrid, but only two ultimately emerged as likely bidders. They were China’s state-owned State Grid and Cheung Kong, a conglomerate owned by Hong Kong tycoon Li Ka Shing. Unfortunately for them, Australia’s Treasurer Scott Morrison last week moved to block the deal, citing national security concerns. As a result, the NSW government will be restarting its sale process, which this time may likely involve local bidders.

Commenting on Morrison’s decision, Cheung Kong stated: “We believe that the Australian government must have reasons beyond the obvious which led them to make today’s announcement.” This was yet another setback for Li, after the European Commission rejected his bid to take over the UK’s O2 last May due to antitrust concerns.

As expected, the news angered China. It called Australia “protectionist” and warned of a decrease in investments to the country. Displeased about the verdict, State Grid insisted it had satisfied Australia’s regulations and bidding requirements. Many reckon the decision may further strain Australia’s economic ties with China, its largest trading partner, after both countries recently clashed over Beijing’s territorial claims in the South China Sea.

The ruling was not the first of its kind since Malcolm Turnbull took office as Australia’s Prime Minister last September. Four months ago, his government prevented Shanghai Pengxin Group from acquiring cattle farming company S. Kidman & Co, whose private land holding, according to the Sydney Morning Herald, constitutes 1 per cent of Australia’s total land mass. If the deal had gone through, it would have been valued at around AUD 370 million.

China’s investments also face increasing opposition elsewhere. Due to national security fears, the UK’s Prime Minister Theresa May last month postponed the decision to approve a Somerset-based nuclear plant construction (widely known as Hinkley Point C) backed by France and China. Greg Clark, the UK’s Secretary of State for Business, Energy and Industrial Strategy, stated that the government would study all parts of the project carefully before reaching a verdict, which will take place this autumn.

Nevertheless, if it is of any consolation to China, State Grid already owns electricity networks that serve Sydney and Melbourne. At the same time, it also looks set to acquire CPFL Energia. The 23 per cent stake in the Brazilian power generation company is valued at BRL 5,852 million (USD 1,819 million).

According to Zephyr, the M&A database published by Bureau van Dijk, the NSW government’s largest privatisation to date was the sale of Transgrid, an electricity transmission network operator. The deal, which took place last year, was worth AUD 10,258 million. It involved acquirors such as Wren House Infrastructure Management and La Caisse de dépôt et placement du Québec.

© Zephyr