UPDATE 2-GE buying $535 mln stake in China XD Electric

Tue May 8, 2012 2:36am EDT

* XD shares jump 10 pct on the news

* GE will use XD technology to build primary transformers

* Deal being negotiated over the past two years - source

By Lynn Adler and Denny Thomas

May 7 (Reuters) - General Electric Co is buying a 15 percent stake in Shanghai-listed China XD Electric Group for about $535 million, giving the largest U.S. conglomerate a foothold in China's vast electrical infrastructure market and access to XD's technology.

The two companies have also agreed to form a joint venture to distribute GE's electrical grid solutions to XD's local customers. XD will control 59 percent of the joint venture, with GE owning the rest, a source with direct knowledge of the matter told Reuters.

Strapped for growth in their home market, U.S. and European companies have been long trying to access China's vast and rapidly growing economy.

Often, Chinese regulations limit buyers from buying control of Chinese companies and multinational companies have structured joint venture deals or settle for small minority stakes.

This deal signifies a shift in China's industrial sector, as it evolves from a low-cost manufacturer to having technology of its own that can be exported. Under the deal, GE will use XD's technology to build the old legacy transformers which will then be sold using GE's global sales network.

The joint venture gives GE access to "primary" equipment such as large transformers and breakers that modify and switch power within the grid, Bob Gilligan, president and chief executive officer of GE's digital energy business, said in an interview.

China has developed technology used on a large scale for a competitive portfolio of products, Gilligan added.

The deal has been in the works for almost two years, the source said, adding: "This would be the blue-print for similar transactions going forward. The source was not authorised to speak to the media.

XD Electric, which is 58 percent controlled by Xian government, is one of China's largest primary equipment providers and offers a broad range of products and exports products to over 40 countries.

The global transmission and distribution (T&D) industry is estimated to be worth $100 billion and China is one of the fastest growing markets. China represents about a quarter of the T&D industry's projected expansion and the country is expected to invest about $600 billion in electrical infrastructure over the next decade, a statement from GE said.

SHARES JUMP

Shares in XD, with a market value of about $2.7 billion, jumped 10 percent on the news. The shares resumed trading on Tuesday after being suspended since April 20.

GE, which is expanding in China as the growing middle class requires more electricity, said the companies will deliver electric transmission and distribution and grid automation solutions to customers globally.

"GE is continuing to look for alternative ways to grow and expand its business," said Gilligan. "This investment helps us better serve energy-intensive industries like utilities, like mining, like steel."

GE, will also appoint a representative to XD's board of directors. GE shares fell 0.1 percent at $19.32 on the New York Stock Exchange on Monday, near the top of the past year's range between $14.03 and $20.42.

Other global companies have been forming joint ventures to tap into China's industrial growth.

Last year, French engineering group Alstom struck a deal with Shanghai Electric Group to form a 50:50 joint venture combining both companies' power plant boiler divisions that is forecast to have sales of about 2.5 billion euros ($3.63 billion).

Large, in-bound majority-stake deals have been rare in China, with only 14 deals valued at $1 billion and above since 2001, compared with 26 minority stake deals, Robert W. Baird & Co, a mid-market investment bank, said in a recent report.

Citigroup was the sole financial advisor to GE, while CICC advised XD Electric.