Billionaire Li Ka-shing has offered to buy UK power grids from France's EDF for £5.8-billion ($9.1-billion U.S.), giving his companies a foothold in more lucrative overseas markets.
Cheung Kong Infrastructure (CKI) and Hongkong Electric (HKE) said they won an auction for three power distribution grids and private power networks owned in Britain by EDF, the world's second-largest utility.
EDF's UK unit, EDF Energy Networks, distributes electricity to 7.8 million customers and generates around a fifth of Britain's electricity.
The acquisition covers firms that distribute electricity in southeast and eastern England, including London, and provide power-related infrastructure services under long-term contracts.
The announcement in Hong Kong confirmed an earlier Reuters story from sources, one of whom said the deal was the biggest North East Asian investment into Europe.
'Fits the Bill'
Utilities throughout Europe are shedding assets to pay for billions of euros of takeovers and to raise money to invest in new power plants.
The deal, which is subject to regulatory approvals, comes as part of a slew of grid sales in Europe, partly for regulatory reasons and partly because the assets no longer provide the returns the utilities have expected.
"It fits the bill," said Macquarie analyst Wei Sim, referring to the acquisition. "That's the type of asset they're looking for – in English-speaking, OECD countries. Historically, where they've gone wrong was in greenfield projects, but these are long-term contracts with regulated returns."
CKI and HKE would each hold 40 per cent of the entity buying the UK assets, with the rest held by two foundations controlled by Mr. Li, the companies said in a statement in Hong Kong.
Hutchison Whampoa Ltd, chaired by Mr. Li, owns 85 per cent of CKI. Cheung Kong Infrastructure, headed by Mr. Li's son Victor, owns close to 39 pct of HKE.
In Paris, EDF confirmed it received an offer from the Hong Kong companies for the British assets.
Limited Hong Kong Growth
Analysts said the deal would double CKI's presence in the UK, a key market as it looks to expand globally given limited room for growth in Hong Kong. CKI is already invested in Britain's gas and water industries and owns utility businesses in Australia, Canada and New Zealand.
"I think the market will take it positively," Macquarie's Mr. Sim said. "The things they've done in the past 6-12 months were value accretive, but not large enough to move the needle. This is large enough to make a difference in their capital structure."
"This is going to bring the company from a high-cash position to a relatively high-gearing position."
HKE and CKI beat a rival consortium that included Macquarie Group, Canada Pension Plan (CPP) and the Abu Dhabi Investment Authority (ADIA).
The purchase should also silence critics concerned that CKI has been sitting on too much cash for too long. The company has cash reserves of HK$10-billion, which it needs to deploy to get a higher return, according to CLSA.
Largest Deal Since October 2006
The transaction is the largest such deal since October 2006, Thomson Reuters data shows, when a group of investors including Macquarie funds bought Thames Water for £8-billion, and rival water firm AWG was sold to funds including CPP for £5.57-billion.
The deal should boost CKI's earnings by 10-15 per cent next year as it puts its cash to better use, said an analyst at a major Western bank, who could not be named due to company policy. HKE's 2011 earnings could increase 5-10 per cent, he added.
The credit crisis hampered funding for deals that rely heavily on cheap debt in order to ramp up returns from low-margin infrastructure companies.
Both E.ON, the world's largest utility by sales, and Sweden's Vattenfall have sold their high-voltage, long-distance power grids in Germany.
Deutsche Bank, Barclays Capital and BNP Paribas advised EDF, while The Royal Bank of Scotland advised HKI and CKI.