Exclusive: Portugal's EDP could create Latam JV with China Three Gorges if takeover bid fails - sources

LONDON/SAO PAULO (Reuters) - Portugal’s Energia de Portugal EDP could propose a joint venture with China Three Gorges (CTG) allowing CTG to expand its foothold in Brazil and Latin America if the Chinese power giant’s bid to take over EDP fails, people familiar with the matter said.

FILE PHOTO: The logo of Portuguese utility company EDP - Energias de Portugal is seen at the company's offices in Oviedo, Spain, May 14, 2018. REUTERS/Eloy Alonso/File Photo

CTG, EDP’s main shareholder with a 23 percent stake, is among Chinese state-backed companies that have been increasing their investments in European countries such as Portugal, Greece and Cyprus over the past few years. But tighter regulatory scrutiny across the EU has cast doubt on whether this can continue.

The Chinese utility launched a 9 billion euro ($10.15 billion) takeover proposal for EDP last May. The transaction has moved at a slow pace however and sources say CTG has yet to complete regulatory approval filings in Europe and the United States.

EDP has always described CTG’s bid as too low, but the Portuguese government backs it.

The bid has also been complicated by an alternative plan launched by activist investor Elliott for EDP to divest assets across Brazil, Portugal and Spain. Elliott holds a 2.9 percent stake in EDP.

As CTG is keen to expand in Latin America, a joint venture in the continent would provide a satisfactory outcome should the takeover offer for EDP fail, two sources said.

EDP’s Brazilian subsidiary EDP Energias do Brasil has a market capitalisation of $2.8 billion, while CTG has unlisted assets in the country. The two companies already have a JV in a project in Peru.

CTG did not immediately respond to a request for comment. EDP Energias do Brasil declined to comment.

“If CTG fails to increase its stake, a return to the status quo is impossible... CTG can end up taking ownership of the Brazilian business and have a smaller stake in EDP,” one of the sources said.

At a strategic update to investors held on March 12, EDP said it plans to sell 2 billion euros worth of assets in Portugal and Spain, and raise 4 billion euros via an asset rotation programme until 2022 to fund its expansion in renewable energy and repair its balance sheet.

The sale of the Iberian assets also reflects part of Elliott’s demands, although the activist investor proposes divestments of 7.6 billion euros.

EDP owns 51 percent of EDP Energias do Brasil, a Brazilian holding company that generates, distributes and trades electric power. With operations in seven states of Brazil, the firm owns one thermoelectric plant, 16 hydropower plants, two power distributors, a trading company and a power grid.

Sources had previously told Reuters that EDP has started a sale process for its thermoeletric plant Pecem in the state of Ceara.

“The idea is to combine the companies owned by CTG in Brazil with EDP’s listed subsidiary there,” a third source said.

CTG owns 17 hydropower plants and 11 wind farms in Brazil with 8.2 GW installed capacity.

The assets are estimated to be worth around $5.6 billion, which means CTG would control roughly two thirds of a potential combined listed entity, the third source added, cautioning that there are no talks between the parties at this stage.

Editing by Alexandra Hudson