China / Portugal: bail-out?

Rich buyer, attractive target – other governments may not be so lucky

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So it’s true – China is going to bail out the eurozone, after all. This week’s sale of a stake in Energias de Portugal to China Three Gorges Corp for €2.7bn offers one route to doing so: a resource-hungry Chinese energy producer looking for a bargain (as Beijing sees it) from the sale of state assets that the debt crisis has provoked. Portugal was lucky – rich buyer, attractive target. Other governments may not be.

CTG is paying the equivalent of €3.45 a share for its 21 per cent stake in EDP – a 53 per cent premium over the pre-announcement close. That is because EDP offers the buyer two valuable assets – renewable energy technology, and the prospect of expansion into Latin America. About 40 per cent of EDP’s earings before interest, tax, depreciation and amortisation in the first nine months of 2011 were from wind power and Brazil. CTG is also offering a further €2bn investment in wind farms and a €2bn credit facility for EDP, enhancing its bid’s attractions.

This transaction is no template for future eurozone privatisations, however. Electricity producers in other debt-laden countries such as Ireland or Greece lack EDP’s international profile, for starters. Even China would balk at buying small operators entirely dependent on domestic markets. EDP is also arguably Portugal’s most attractive asset; from now on Lisbon is more likely to be competing with Athens for buyers’ attentions. Greece is currently trying to sell a €50bn portfolio of state assets, but it mainly includes buildings, ports and an abandoned airport. Nor is privatisation necessarily the answer to indebted countries’ problems. In many cases, it will provide the cash to service rather than pay down debt. For example, Portugal needs €39bn of financing in 2012, according to the International Monetary Fund.

The eurozone’s new year sale will not be a bargain for anybody.

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