State Grid said to be in talks to buy Brazilian power distributor

Move by nation’s dominant electricity company would be its latest within plans to own up to US$50 billion of overseas assets by 2020

PUBLISHED : Thursday, 23 June, 2016, 8:42pm
UPDATED : Thursday, 23 June, 2016, 8:42pm

State Grid Corporation of China, the nation’s dominant electricity distributor, is in talks to buy a stake in Brazilian power distributor CPFL Energia, according to well-placed industry sources.

The state-owned company is believed to be in discussions to purchase some or all of privately-held cement-to-ship-building conglomerate Camargo Correa’s 23.6 per cent holding in CPFL.

Based on CPFL’s market value of about 20.8 billion reais (HK$48.2 billion), the entire stake could be valued at about US$1.5 billion, not including any premium paid by the acquirer.

A spokesman for State Grid said the Beijing-based company’s policy is not to comment on market speculation. A representative for CPFL declined to comment.

The Chinese giant already operates in Brazil, running about 6,000 kilometers of transmission lines.

In April, it won the largest portion of an auction of transmission lines in the country, gaining a total of 1,005 km.

The Chinese power distributor has been making major acquisitions overseas in recent years as part of Beijing’s push for state companies to expand its operating scale and influence globally.

State Grid’s former chairman Liu Zhenya, who stepped down last month after reaching retirement age, unveiled ambitions in 2012 of owning US$30-50 billion of overseas assets by 2020.

State Grid has spent at least US$17.6 billion since 2009 on power distribution assets in Hong Kong, the Philippines, Brazil, Portugal, Australia and Italy.

Besides seeking to reap investment returns, analysts think State Grid could also gain from understanding how overseas deregulated utility markets operate, to prepare itself for the ongoing reform of the mainland’s power market, that includes a revamp of distribution tariffs to make them more market-oriented.

State Grid faces the ongoing challenge of transitioning from a system where its gross profit margins were guaranteed — the simple difference between state-stipulated prices charged by power plants and retail prices charged by distributors — to one where both prices are based on demand, supply and operating costs.

The transition also gives monopoly distributors like State Grid and its only domestic peer China Southern Power Grid, which operates in five southern provinces, the incentive to become more cost efficient and profit-oriented.

Beijing has been rolling out power market reforms in the transmission and distribution segment since the start of last year in seven provinces and major administrative regions, and plans to implement them in 12 more by year end.

The reform is part of President Xi Jinping’s push to overhaul the country’s bloated state-owned businesses and allow market forces to play a bigger role in energy prices.

The energy market has been gradually liberalised over the past decade to drive down conservation and supply costs and encourage conservation.

Camargo Correa has not made any decision on its stake in CPFL, it said in a statement on Wednesday, adding it is always evaluating strategic opportunities and is regularly in contact with potential investors. 

It has been selling assets to pay fines related to the country’s largest-ever corruption investigation that has engulfed state-run oil firm Petroleo Brasileiro.

Earlier this month State Grid was named as preferred bidder for a 14 per cent stake in Belgian electricity and gas distribution system operator Eandis Assets.

It is also among suitors planning to submit bids for Australian power distribution network Ausgrid, which could fetch more than A$10 billion.

State Grid distributes electricity to 1.1 billion people and delivered a profit of 86.5 billion yuan last year on revenue of 2.08 trillion yuan.