SHANGHAI China Three Gorges Corp's $3.5 billion acquisition of the Portuguese government's stake in utility EDP (EDP.LS) highlights China's appetite for physical assets in troubled economies and its ability to make its bids attractive with the promise of financial support.
China is looking to pick up assets such as infrastructure and utilities in places like Europe at a bargain, rather than only buying the bonds of countries facing economic difficulties.
To win such deals, it is able to harness a formidable advantage that few other countries or companies possess -- alliances between its state-owned industrial firms and state-owned banks, with the backing of the government.
As such, expect to see more Chinese state firms splash out with hard-to-beat merger and acquisition deals as they go bargain hunting for assets that can help them expand overseas or secure resources, analysts say.
In the case of Three Gorges, what it said was its first overseas acquisition amounted to a whopping 2.7 billion euros for just over a fifth of EDP, bought at a 53 percent premium to EDP's share price.
"More and more Chinese companies are looking for investment opportunities in Europe and basic infrastructure projects could be a good choice, as the heavily indebted euro zone members tend to offer relatively low pricing of their assets," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.
"Just as happened in the 1997 Asian financial crisis and the 2008/2009 global financial crisis, another window of opportunity is opening for Chinese companies to make more overseas investments, following the unfolding euro debt crisis."
DIVERSIFYING FROM BONDS
The deal by Three Gorges, China's top hydropower producer named after the eponymous project on the Yangtze River that is its main asset, comes just two weeks after Reuters reported another development that suggests Beijing is keen not to rely too much on investments in European and other government bonds.
China's central bank plans to create a new vehicle to manage investment funds worth $300 billion that will be focused on improving returns on the world's largest stockpile of foreign exchange reserves, a source said.
In a further sign of the government's keenness to diversify its foreign exchange reserves, China Investment Corp CIC.UL, the country's $410 billion sovereign wealth fund, is set to receive additional funding of up to $50 billion, two sources with knowledge of the matter told Reuters on Friday.
The deal by Three Gorges, for whom Credit Suisse CSGN.VX was the lead financial adviser, serves as a reminder that such investments will not come only via the central bank or sovereign wealth fund, but also from state-owned firms, many of which are sitting on piles of cash themselves.
Beijing hopes such investments will not run up against the kind of resistance that CIC might meet if it looks to buy up infrastructure or other assets in Spain or Greece, for instance.
"This reflects the judgment and decision of Three Gorges and is nothing to do with state strategy," Li Junfeng, deputy head of the Energy Research Institute under the National Development and Reform Commission, the economic planning agency, said of its paying a 53 percent premium to EDP's share price.
"Let's stick to it being a commercial deal and not politicize it," Li said.
However, a move by Three Gorges in the last several months, just ahead of its first major overseas acquisition, speaks volumes about the kind of government support it needed to pull off such a deal.
It set up an office for strategic planning operations in Beijing, far away from its operational headquarters in the central province of Hubei, putting it closer to government agencies and the "Big Four" state commercial lenders as well as policy lenders such as China Development Bank (CDB) CHDB.UL.
Relationships with some of the banks appear to have proven crucial as bargaining chips.
As part of the agreement, Three Gorges said it would promote lines of financing for Portuguese banks and other companies, potentially including capital for Millennium bcp (BCP.LS), the country's largest listed bank.
All told, the money flowing in the Portuguese economy from the deal could total 8 billion euros, treasury secretary Maria Luis Albuquerque said.
That proved too much for the leading competitors in the deal, Germany's E.ON (EONGn.DE) and Brazil's Eletrobras
Price and the strategic support Three Gorges could give to EDP were the main factors in the decision of the winning bidder, but the lure of other financial support for Portuguese companies and banks helped, said a source close to the deal.
"That potential was definitely a plus in the evaluation process," the source said, declining to be identified because he was not authorized to speak to the media.
A Three Gorges spokesman declined to give details of the EDP deal, including which banks were involved.
However, CDB in particular has been very active in promoting Chinese firms' operations in other emerging markets, having this week signed a loan deal with Turkey's biggest mobile phone company Turkcell (TCELL.IS) to finance purchases from Chinese telecom equipment maker Huawei HWT.UL for up to $250 million.
China likely overbid for EDP's assets and will enjoy below-average return on investment and return on equity, said Alberto Forchielli, founding partner of Mandarin Capital Partners, a Sino-European private-equity firm.
"But they might make up for it because they probably enjoy cheap financing from Chinese banks," Forchielli said. "The Europen bidders withdrew because the price was probably too high and not acceptable by Western shareholders."
(Additional reporting by Langi Chiang and Aileen Wang in BEIJING, Samuel Shen and Ruby Lian in SHANGHAI and Michael Flaherty in HONG KONG; Editing by Vinu Pilakkott)