China tries new resource M&A approach
New reports from Down Under are saying that China's leading power distributor State Grid Corp has made a major purchase in Australia, a move that initially looks controversial but could actually mark the start of a smarter approach by Chinese firms to global M&A in the sensitive resource and energy sectors. State Grid, which has been on a global buying spree over the last year, has announced it is acquiring 41 per cent of ElectraNet, a grid operator in the Australian state of Queensland, from a local government entity. No value of the purchase was given, but Australian media had previously reported that State Grid would pay A$500 million for the stake, equal to about US$523 million.
The deal is interesting because it comes not long after Canberra banned leading Chinese telecoms equipment seller Huawei from helping to build a new government-backed broadband network in Australia due to national security concerns. This new purchase, which presumably must still be approved by Canberra, also comes as Chinese oil major CNOOC (0883.HK; NYSE: CEO) attempts to buy Canadian rival Nexen (Toronto: NXY) for US$15 billion. That deal is also taking a longer than usual time to receive government clearance, again due to concerns over such a big sale to a Chinese firm in the sensitive energy and national resource sector.
So, what's different about this time that led me to my earlier assessment that this new Australian deal could mark the beginning of a smarter approach to global M&A by Chinese energy and resource firms? The answer lies in a single word: control. CNOOC's purchase would give it complete control of Nexen, but this current deal entails only a minority stake sale to State Grid. As such, the Queensland government would retain managment control of ElectraNet since it would continue to own the majority of the company.
Thus this stake purchase by State Grid looks more like a shorter-term investment designed to help it earn some profits, rather than a longer-term purchase to build up a global power grid portfolio. That's an important distinction, because Canberra and Australians in general are likely to feel much less threatened by this kind of investment compared with an outright purchase of ElectraNet by State Grid.
We saw a similar move by PetroChina (0857.HK; Shanghai: 601857; NYSE: PTR) just last month, when the Chinese oil major announced a deal to co-develop a US$3 billion oil pipeline in Canada with local partner TransCanada. That pipeline venture will be a 50-50 deal, again meaning that PetroChina won't have outright control of the asset and will receive strong management oversight from its local partner. Unlike the CNOOC-Nexen deal, the PetroChina pipeline tie-up has received barely any attention in global media since it was first announced, which means it may face little or no opposition when it applies for government approval.
All of this brings me back to my original point, which is that these latest deals could mark the beginning of a shift in the global M&A strategy by Chinese energy and resource firms in sensitive western markets. In short, we could see the Chinese firms take more of these kinds of non-controlling stakes in the future, which are likely to be much less controversial since they include a strong local player in the equation to maintain oversight of the Chinese partner.
Such an approach indeed looks smart, since many of these cash-hungry western governments and companies would welcome Chinese investments in their energy and resource assets. What they're less enthusiastic about is having Chinese managers actually run the assets -- a concern that would be molified through this kind of sale of non-controlling stakes.
Bottom line: The purchase of a minority stake of Australia's ElectraNet by China's State Grid could mark the start of a wave of non-controlling stake buys by China in western energy and resource firms.