May 14, 2018 / 9:37 AM / 4 months ago

Portugal's EDP shares leap as investors bet on higher bid

LISBON/PARIS (Reuters) - Shares in Portuguese utility EDP (EDP.LS) jumped as much as 12 percent on Monday to trade above the price of a bid by China Three Gorges, indicating investors think the $10.8 billion offer is an opening gambit that could lead to a higher or rival bid.

FILE PHOTO: Portuguese electric power company Energias de Portugal (EDP) CEO Antonio Mexia speaks during a news conference in Lisbon, Portugal June 6, 2017. REUTERS/Pedro Nunes/File Photo

The gains also show investors think there is little that could stop a bid, as the European Union has limited power to block one and the Portuguese government says it has no objections, despite a call from its Communist allies to renationalize EDP.

EDP shares rose as high as 3.49 euros, above China Three Gorges’ (CTG) 3.26 euros per share bid, which represented a premium of less than 5 percent on EDP’s Friday closing price. The stock closed 9.32 percent higher at 3.40 euros.

The deal, proposed late on Friday, values EDP at 9.07 billion euros ($10.8 billion), excluding the 23 percent stake the Chinese state-controlled utility already owns.

CTG [CYTGP.UL] could not be reached for comment, but a source familiar with the situation said the bid was a pre-emptive move to deter other utilities from making a bid. The source also said EDP considered the offer too low and was likely to hold a board meeting this week to review it.

A banking source familiar with the matter ruled out any EU utilities launching a counter-bid or coming forward as a “white knight” with an alternative proposal, but expected EDP would negotiate with CTG and push for a better price and a premium.

“CTG has a lot of room for maneuver and if there is a price war, they will do it,” said a second banker close to the matter, but not directly involved with it.

He added CTG was to keep EDP as a Portuguese company listed in Lisbon.

Bloomberg reported EDP was poised to reject the bid on the grounds that it undervalued the firm.

CHINESE EXPANSION

Analysts say CTG’s price is low compared with other recent Chinese bids for European energy assets.

“The offer price is too low to be successful,” state-owned Portuguese investment bank CaixaBI said in a note.

European utilities lobby Eurelectric’s chief Kristian Ruby said he was not surprised by CTG’s move and expected to see more such bids as China pursues EU electricity infrastructure assets.

Jean-Marc Ollagnier, global head of resources at Accenture, saw the bid as part of China’s “One Belt One Road” strategy under which it wants to reverse the direction of the investment flows along the old Silk Road trading route.

“China knows it will face local resistance about strategic assets, but clearly this is a long-term strategy and we will see progress in the coming years,” he said.

CTG and another Chinese state company, CNIC, together hold 28.25 percent of EDP shares. With full control of EDP and its renewables unit EDPR (EDPR.LS), CTG would become a top European renewables player, with a large presence in the United States and Brazil.

But other shareholders may balk at being low-balled.

Funds holding major EDP stakes include Capital Research with 12 percent, Masaveu Herrero with 7.19 percent, BlackRock with 5 percent, Mudabala Investment with 4.06 percent and Capital World with 2.69 percent, ThomsonReuters data showed. Qatar and Norway’s sovereign wealth funds also each hold over two percent.

JP Morgan said CTG’s offer was too low to achieve full control of a business providing a strategic footprint in U.S. renewables. It expects management and minorities to demand a higher price.

EDP and other shareholders so far have not commented.

RIVAL BID?

Paulo Rosa, a trader at Go Bulling brokerage in Porto, said EDP’s share price jump indicated competing bids could emerge.

Last year, Reuters reported that Spain’s Gas Natural GAS.MC had approached EDP about a possible merger, which was subsequently ruled out by the two companies.

France’s Engie (ENGIE.PA) also reportedly considered a bid, although EDP denied there had been talks.

A bid from a utility could face more government resistance, as private firms may want to cut jobs to boost profitability.

While a takeover of EDP may need clearance from competition authorities in some of the countries in which EDP and EDPR operate, the EU can do little to stop it.

The European Commission has drafted rules to block foreign takeovers of strategic firms, but there is no unanimity on the proposal, which is currently being discussed by the European Parliament and Member States.

With a separate Chinese state-owned firm, State Grid Corporation of China (SGCC), owning 25 percent of Portugal’s state power network REN, China is also circumventing EU unbundling legislation, which bans utilities from owning grids.

More than a decade ago, EU utilities were forced to split off their power grid units in order to make them more accessible to all power generators.

In recent years, SGCC has built up a web of minority stakes in Southern European grid operators - including REN, Italy’s Snam (SRG.MI) and Greece’s Admie - and sources told Reuters this month that State Grid was in talks to buy a 20 percent stake in German grid operator 50Hertz.

The EU has so far not had to consider how to rule on power production and distribution being reunited under a foreign shareholder.

The European Commission’s competition and trade spokespeople declined to comment.

“For Brussels to intervene, there would need to be dumping or an abuse of monopoly,” said Nicolas Goldberg of Colombus Consulting.

French power industry consultant Thibault Laconde said CTG’s move was bound to sharpen tensions over international trade.

“It raises the question of reciprocity. A move in the opposite direction would not be possible,” he said.

Writing by Geert De Clercq; Additional reporting by Sergio Goncalves and Andrei Khalip in Lisbon, Brenda Goh in Shanghai Foo Yun Chee in Brussels and Pamela Barbaglia and Clara Denina in London; Editing by Jason Neely, Keith Weir and Mark Potter

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