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China State Grid aquires Compañía General de Electricidad

Updated: Jan 21

By: Krzysztof Nosowicz and Mia Johnson-Wright


Overview of the deal


Expected to complete in February 2021, China State Grid International Development €2.570 million acquisition of Compañía General de Electricidad from Spanish company, Naturgy, marks a consolidation of assets for Naturgy, in line with their goals of reducing volatility, while being evident of China’s increasing presence in South America. As part of an all-cash deal, this transaction will see SGID acquire Naturgy’s 96% stake in Compañía General de Electricidad, providing the Chilean asset with an Enterprise value of €4.3 billion.


Company Details: China State Grid


Headquarters: Beijing, China

CEO: Shu Yinbiao

Number of employees: 913,546 (2017)

Market Cap: N/A


Company Details: Compañía General de Electricidad


Headquarters: Santiago, Chile

CEO: Antonio Gallart Gabas

Number of employees: 1460

Market Cap: N/AEV: $4.3 bn (CLP)


Short-term consequences


Due to SGID’s pre-existing ownership of Chilquinta Energy, it is possible that Chilean competition authorities will block the acquisition, with this new deal providing the SGID with further access to 45% of Chilean households across 14 regions.This comes as recent US visits have advised South American against dealing with Chinese investors, as recent fears of security and surveillance surrounding Chinese 5G telecommunication technologies, which have increased scepticism around the deal and Chinese investments. That being said, the remaining 4% of the company listed on the Santiago Stock Exchange, reacted favourably to the announcement of the deal.


Additionally, the deal could provide State Grid with costs cuts, since their operations will be merged with their existing presence in Chile. The stock price of CGE rised after the deal was announced



Long-term Upsides


Naturgy’s divestiture of Compania General de Electricidad SA (CGE) comes as a strategic decision to stabilise and consolidate businesses, while decreasing its exposure in non-European markets. This comes following Naturgy’s 2018 management reshuffle, since which, they have made exits from Colombia, Italy, Moldova, South Africa and now Chile, in line with the companies aim of becoming ‘a less volatile company, a more predictable company, a bit more boring, if you will’, as Francisco Reynes, Chief Executive, told reporters in a recent conference call.


Not only will this streamline of assets provide increased synergies to the Spanish company, but the transaction will provide Naturgy with €400 million in capital gains, while reducing net debt by nearly €4 billion to €10.8 billion. With the reduction, Naturgy is provided with significant financial capacity, allowing them to refocus to renewable energy and electricity networks, in countries with stable regulatory frameworks, further responding to the companies aim to become ‘more ambition in our investment and growth plans’.

Meanwhile, for the China State Grid International Development, this investment acts as another step towards improving their position in Chile, following Chinese investment across Chilean industries, from salmon farming to lithium production, with the acquisition of Compania General de Electricidad, being the State Grids second major acquisition in Chile this year, having purchased Chilquinta Energia from San Diego based Sempra Energy in June 2020, for US$2.23 billion. This previous sale provided the State Grid access to two million customers, as the third-largest electricity distributer in Chile, while the newest acquisition of CGE supplies power to 46% of Chilean households, further cementing SGID’s influence in South America.


Similarly, Brazil has also seen significant investment from SGID, with over $12.4 billion having been invested into Brazilian industry, including the acquisition of CPFL Energia SA, in 2017, Brazil’s largest private energy company. State Grid’s new, strong position allows it to use monopoly practices in the energy supply, by either increasing revenue by lifting prices or dumping them to weaken its remaining competitors’ position.



Risks and uncertainties


The stake acquisition will in fact give China a sector boost in the Latin America region and a broader footprint outside the mainland, despite the US’ strategic moves against its expansion. In August, Latin America’s electric utility faced lower demand with increasing cash flow risk. Energy infrastructure is one of the pillars of the chinese Road and Belt initiative, with the US attempts to block it. Chile’s small economic and demographic significance makes its government vulnerable to foreign interference and sanctions.


Furthermore, there is still a significant uncertainty when it comes to the US presidential election, if the new Biden administration finally solidifies its position, their strategy against China will diverge, with Biden’s plans to ally with other global partners such as Europe in its attempts to push China. This creates a risk for Chilean economy to be sanctioned if their ties with China will not be reduced. In the face of a possible sanction crisis, chilean economy would reduce its demand for energy which would weaken CGE’s cashflow.






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