Investors set to reject China Three Gorges’ US$10.8b bid for Portugal’s largest energy firm

Investors expect Three Gorges, which is the biggest investor in EDP, to raise its bid from the current 3.26 a share as they see it as too low

PUBLISHED : Tuesday, 15 May, 2018, 5:38pm
UPDATED : Tuesday, 15 May, 2018, 5:41pm

Energias de Portugal (EDP) is poised to reject a 9.1 billion (US$10.8 billion) takeover offer from China Three Gorges on the grounds that it undervalues Portugal’s biggest energy company, according to people familiar with the matter.

The board of EDP, which may meet as early as this week, views the current bid of 3.26 a share as too low as it indicates a premium of 4.8 per cent over Friday’s close, said the people, asking not to be identified because the discussions are private. EDP is also working with advisers including UBS Group and Morgan Stanley on the potential deal, they said.

Representatives for EDP, UBS and Morgan Stanley declined to comment. Representatives for Three Gorges did not immediately respond to requests for comment.

Shares of EDP surged the most in a decade to above the bid level on Monday, signalling that investors expect the Chinese utility, which is its biggest investor, to sweeten the offer to gain full control. For Three Gorges, which spent two decades building a hydropower plant spanning China’s Yangtze River, the deal would bolster its efforts to expand abroad and give it deeper access to markets in Europe, the US and Brazil.

China’s biggest renewable-energy developer already is the largest shareholder of EDP with a 23 per cent stake and now is seeking more than 50 per cent. While the government in Lisbon has indicated it is comfortable with the Chinese offer, it holds out little incentive for shareholders to tender their stock.

Shares of EDP rose 2.2 per cent to 3.40 in Lisbon on Tuesday, after jumping 9.3 per cent on Monday.

“We believe the price offered is too low for China Three Gorges to achieve full control of a vehicle that provides, among other things, a strategic footprint into US renewables,” Javier Garrido, an analyst at JPMorgan Chase, said in a note. “We expect management and minorities to claim a higher price.”

State-owned China Three Gorges in US$10.8 billion bid for Portugal’s biggest company EDP

The offer adds to a wave of investments China has made overseas, both to earn a yield on its cash and to gain expertise in industries ranging from energy to telecommunications and transport. Concern about those deals has been mounting in the US. European Union governments have been divided in their response, with Portugal among those most supportive of inward investment.

“China Three Gorges is an ambitious company, with expansion already in international hydro, Chinese onshore wind and floating solar, and European offshore wind,” said Angus McCrone, a senior analyst at Bloomberg New Energy Finance in London. “It may have to do better on bid price than the 5 per cent premium so far offered for EDP.”

The low premium offered by Three Gorges echoes the struggle by Fortum had in winning over investors in its bid for Uniper last year. The Finnish utility offered 8 billion to buy out the remainder of Uniper in September, immediately sending shares of the German power generator above the offer prices. At least for now, Fortum has settled for a 47 per cent stake it bought in Uniper from EON, and most other shareholders decided to keep their stake.

The EDP transaction would advance a wave of consolidation among Europe’s leading utilities, which are acquiring assets and development skills in renewables as governments across the region crack down on pollution. EDP is one of Europe’s leading developers of renewable energy, building mainly wind farms and hydro plants, and has expanded in markets including Brazil and the US.