Can China, Lisbon, Brussels and international shareholders all get on?
Friday's bid for Portuguese power generator EDP-Energias de Portugal SA by China's biggest clean energy group throws contrasting agendas into stark relief. Lisbon appears intensely relaxed about China Three Gorges Corp.'s 9.1 billion-euro ($11 billion) buyout plan. But shareholders, the European Commission and possible counterbidders stand in the Chinese bidder’s way.
CTG first invested in the utility in 2012 when the current opposition Social Democratic Party was the part of the ruling coalition. With 23 percent, the Chinese hydropower company now wants to move to more than 50 percent, while maintaining EDP's Lisbon listing and head office. That would keep the company looking Portuguese and preserve a European acquisition currency.
State-controlled CTG was there when Portugal needed friends during its bailout. EDP is lumbered with too much debt, constraining its ability to grow on its own. Any European takeover — the names rumoured have been Engie SA and Gas Natural SDG SA — would be likely to lead to job cuts or a partial break-up. Domestic assent for the move, therefore, looks easy to grasp.
But what works for Portugal may not work for the whole of Europe, nowadays sounding more interventionist on foreign direct investment. EDP's American assets mean the U.S. would also want its say.
Assuming CTG can overcome political obstacles. Then it needs to persuade holders of at least 27 per cent of the stock to accept its offer — ideally not many more — while also deterring any rival interest.
These goals aren't easily reconciled. The current 3.26 euros-a-share bid looks deliberately ungenerous as CTG isn't chasing 100 per cent ownership. It's 5 per cent more than Friday's closing price, and 9 per cent over the last three months' volume-weighted average.
True, bid speculation has distorted this stock since at least the middle of last year, and the shares touched a 15-month low of 2.64 euros in February. Moreover, the price values the company on a debt-free basis at 8.8 times this year's estimated Ebitda. Most major European utilities trade at lower valuations.
Still, a proper premium for control is warranted notwithstanding CTG's existing holding. A conventional bidder pursuing a full takeover would undoubtedly have offered more. Even assuming EDP's undisturbed share price is about 2.60 euros, the usual math would imply an offer of 3.40 euros per share.
Portugal has said EDP's fate is up to its shareholders. A rival offer from a European buyer, capable of justifying a higher price thanks to potential cost cuts, might be what investors want and may get an easier ride in Europe. But that may be harder to swallow domestically.