MarketLine Blog

China Three Gorges takeover of EDP: Deal would leave Portugal dangerously exposed to China

The $10.9bn bid from China Three Gorges, the largest clean energy company in China, was rejected by EDP but the takeover remains very much the most likely outcome – only at present the shareholders would prefer to extract a larger sum of money for a prized asset. Current trading conditions are ideal for China Three Gorges. A relatively poor government (although now at least managing a growing economy and rising employment) in need of foreign investment makes EDP ripe for a takeover bid. Yet to secure this the government will let go a major utilities company with significant international reach and which has interest from other foreign investors. Gains for the Portuguese economy can be found in the proposed deal, but it is the Chinese state-owned company and the Chinese government itself that stands to gain the most.

Fears the amount of Chinese investment pouring into Portugal has left the country overly exposed to the whims of the Chinese government have surfaced before, and for some in Europe they are rising again. When examining a list of recent purchases of Portuguese companies made by state-owned Chinese entities, the extent of the issue about which Ferdinand Ulrich, former CEO of BPI, was harrumphing about in 2015 becomes clear. The danger for the Portuguese government is that in accepting – and indeed encouraging – large sums of Chinese money into the national economy, the country has become beholden to decisions taken by Beijing that will have been made with no regard for the impact upon Portugal itself.

The deal to buy EDP ranks among the largest Chinese overseas investments, but due to the nature of the EDP business, the matter is not solely one between the shareholders and Beijing. EDP operates power plants and facilities in 13 other countries, the government in each of which could demand certain conditions before allowing operations under their jurisdiction to fall under the control of the Chinese government. Persevering could very well damage relations with other states holding interests in putting money into Portugal. Keeping the company together, therefore, appears to be an increasingly distant prospect when the complexities of local conditions in all of the territories where EDP operates are taken account of.

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