China Southern Power Grid buys stake in Luxembourg grid operator Encevo

Deal comes despite other European governments putting up unwelcome signs to Chinese infrastructure investment

China continues to build up its economic ties with Luxembourg as China Southern Power Grid secures a 25.48% stake in Luxembourg electricity and gas grid operator Encevo. The seller is known to be Paris-based private equity firm Ardian. The financial terms were not disclosed.

Encevo has two principal subsidiaries: Creos, which operates electricity and gas grids; and Enovos Luxembourg, which sells energy in the wholesale markets to a diversified portfolio of customers in both Luxembourg and Germany. Encevo is also active in power generation, particularly in the renewable energy sector.

It is common knowledge that Chinese firms are keen to acquire European infrastructure assets, but companies are facing pushback in some countries. Indeed, the Luxembourg deal comes only weeks after the German government blocked the State Grid Corporation of China from acquiring a 20% stake in 50Hertz, one of the four main transmission companies in Germany.

The way the German government blocked this minority acquistion of 50Hertz by Chinese interests was not straightforward. Majority shareholder, Belgian electricity transmission system company Elia, had first right of refusal on the 50Hertz stake being put up for sale by Australian fund manager AFM. The German government put together a deal where Elia exercised its option, but then immediately sold the stake on to promotional bank Kreditanstalt fur Wiederaufbau, acting on behalf of the government.

That move by Germany sent a strong message to China that investment in critical infrastructure - even minority stakes - is not welcome.

An important consideration underlying some European governments' thinking is that both State Grid Corporation of China and China Southern Power Grid are state controlled enterprises.

The sellers in this deal, Ardian, along with co-investors, concluded the acquisition of a minority stake in Encevo (formerly Enovos International) from ArcelorMittal way back in May 2012.

Prior to this minority stake acquisition, Enovos International was formed through the merger of three companies in 2009. As an independent energy company in the northern European market, Enovos International's mission was to procure, transmit and distribute electricity, natural gas and renewable energy to municipal suppliers, industry and private households.

ArcelorMittal agreed to divest its 23.48% interest in Enovos International SA to a fund managed by AXA Private Equity (later called Ardian) for a purchase price of Euro 330 million, as part of its strategy of selective divestment of non-core assets.

In May 2012, the remaining shareholders in Enovos International were E-On (10.00%), RWE (18.36%), Electrabel GDF Suez (4.71%), the Grand Duchy of Luxembourg (25.44%), Société Nationale de Crédit et d'Investissement Luxembourg (SNCI-10.01%) and Ville de Luxembourg (8.00%).

In 2013 AXA Private Equity was spun off as an independent, employee-controlled private investment company. It simultaneously rebranded as Ardian.

Ardian is now one of the world's largest private equity managers, and has significant holdings of infrastructure assets. For instance, in 2015, Ardian acquired an additional stake from German utilities E.on and RWE.

The state of Luxembourg still holds 28% of Encevo, while state owned financial institutions SNCI and BCEE together hold 26.2%. And the City of Luxembourg owns a 15.6% stake. Thus, it is unlikely that China Southern Power Grid would have entered negotiations with Ardian without first informally sounding out the Luxembourg government.

This recent deal continues to strengthen economic links between China and Luxembourg, with ties in financial services in particular becoming closer over recent years. A number of major Chinese banks have their European headquarters in the Grand Duchy. And it was recently announced that the 2019 meeting of the Asian Infrastructure Investment Bank (AIIB) will be held in Luxembourg.



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8 Aug 2018

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