Cost Be Dammed, China's Ready to Pay More for EDP

HONG KONG, BLOOMBERG -- Prepare for a higher bid in the likely event that EDP-Energias de Portugal SA rejects a 9.1 billion euro ($10.9 billion) offer from China’s biggest clean-energy company.

The Portuguese utility is poised to rebuff the approach from China Three Gorges Corp. on the grounds that it undervalues the company, Dinesh Nair, Manuel Baigorri, Aaron Kirchfeld and Joao Lima of Bloomberg News reported Monday, citing people with knowledge of the matter. EDP shares surged above the takeover price in Lisbon, signaling investors expect a sweetened bid.

That makes sense. This isn’t the type of debt-fueled, private entrepreneur-led overseas acquisition that’s drawn Beijing’s ire. Three Gorges, operator of the world’s biggest hydroelectric dam, is a state-owned company and its target is in line with the country’s ambitions to acquire overseas infrastructure and clean-energy know-how. What’s more, the Chinese company has the capability to improve its offer.

As I’ve written before, purchases that advance Beijing’s strategic objectives, such as projects tied to President Xi Jinping’s belt-and-road initiative, won’t have any trouble getting approval.

The 3.26 euro per-share offer is just 4.8 percent higher than EDP’s closing stock price on Friday, though the shares had run up on speculation that the company was in play. Gas Natural SDG SA of Spain and Engie SA of France had been cited as potential bidders.

The offer from Three Gorges, which is already the largest shareholder in EDP with a 23 percent stake, values the company at 8.9 times enterprise value to Ebitda, higher than the 7.3 times median for its European peers, according to Bloomberg Intelligence analyst Elchin Mammadov.

Granted, it’s a major deal for China, second in enterprise value only to China National Chemical Corp.’s $46 billion acquisition of Syngenta AG.

Still, Three Gorges has been vocal about its expansion plans and its financial position is strong. Its Shanghai-listed unit, China Yangtze Power Co., almost doubled free cash flow to more than $5 billion between 2014 and last year, according to data compiled by Bloomberg. It can also count on funding support from the likes of state-owned policy lender China Development Bank, which has been charged with supporting the belt-and-road initiative.

EDP has much to offer. The Portuguese utility has a bigger global bandwidth, with wind farms in countries including the U.S. and Brazil. Three Gorges also has interests in Brazil, having paid $3.7 billion for hydropower plants in the country in 2013 and acquired further hydro projects from Duke Energy Corp. in 2016. It can expect to wring some cost savings from consolidation.

The U.S., where EDP is the third-largest wind-farm operator by installed capacity, may be the biggest potential stumbling block. Still, even if the Committee on Foreign Investment in the United States forces the divestiture of EDP’s American wind farms, there’s still enough there to justify the interest of Three Gorges, which lacks the Portuguese company’s international expertise and its global supply chain spanning developed and emerging markets.

Beijing and Lisbon both appear to want this deal. A moderately more generous offer may be enough for shareholders to join the party. Then only European and U.S. regulators will remain to be convinced.