As cash-strapped European governments put assets up for sale, Chinese companies and funds are seen as increasingly welcome investors, displaying a growing firepower that is helping to reshape the global economy.
Some of the more surprising bidders emerging for European assets are China’s power companies, often large conglomerates expanding into western markets for the first time.
As the euro zone crisis plays out, Chinese groups have been eager to examine the hard assets being sold, even though the bloc’s debt has appeared to be a tougher sale to Beijing.
More Chinese deals are expected this year as cash-strapped governments and companies put infrastructure on the auction block, particularly in the utilities sector.
China’s $410-billion sovereign wealth fund has also shown an interest in investing in infrastructure in developed countries.
The latest Chinese purchase - an investment by China’s sovereign wealth fund in the UK’s Thames Water - highlights Chinese investors’ preference for low-risk physical assets that carry steady returns.
Among the European stakes expected to come up for sale from sovereign nations are electricity transmission assets in Portugal and Ireland. These have attracted Chinese interest, say bankers.
While Chinese power companies are relatively new to European markets, their spending power and close ties to Chinese financial institutions make them attractive partners for debt-strapped European governments.
China’s Three Gorges, the operator of the hydroelectric dam on the Yangtze, won a hotly contested bidding process for a stake in EDP, Portugal’s dominant power company. For Three Gorges, it marked the company’s first major overseas acquisition, and for Portugal it marked a welcome opportunity to roll out the red carpet for other potential investors.
China’s State Grid, the country’s largest electricity distribution network and one of the largest companies in the world by asset size, is in the final bidding round for Portugal’s REN, which operates power transmission and natural gas distribution networks. After investing in transmission assets in the Philippines and Brazil, State Grid has said it plans to expand overseas investment during the next four years.
“For all of the Chinese power companies one of their strategic aims is to grow their global footprint. So whenever a new opportunity comes up they will take a look,” said Daniel Qiu, managing director in the energy group for Credit Suisse, which advised Three Gorges on its purchase of the EDP stake.
Chinese power companies have been reticent to explain their overseas strategies but people close to the companies say increasing their revenues and expanding into new markets are considerations.
Euro zone assets expected to go on sale include a minority stake in Ireland’s Electricity Supply Board. The Greek government has pledged sell €50-billion worth of its assets, which include stakes in its gas network. Italy has also outlined a privatization programme. State-owned properties and utilities belonging to local authorities, excluding water companies, are expected to come up for sale.
“The eurozone sovereign debt crisis is leading to a significant change in investment strategy by those nations running a budget surplus,” said Pip McCrostie, global head of transactions at Ernst & Young. “It’s unlikely that Thames Water will be the only deal of its kind as cash-rich economies such as China refocus their investment strategy from government debt and market debt securities to hard assets.”
The UK is seen by some M&A specialists as one of the most open markets to the Chinese. “The price is right and sterling is cheap,” said one dealmaker. “UK is uniquely open to Chinese buyers - most mature markets have foreign investment regulations.”
European companies selling assets are also expected to get a close look from Chinese investors, including Veolia, the water company, which is in the process of an €5-billion disposal, which includes its UK water business.