China’s State Grid International Development Limited (SGID) has made a major move into the Chilean market with the acquisition of Chilquinta Energia for US$2.23 billion.
Chilquinta was put up for sale by San Diego-based Sempra Energy. Its interests, including 100% of Chilquinta, will be sold for US$2.23 billion in cash, subject to adjustments for working capital and net indebtedness.
The sale will also include Sempra Energy's 100% interest in Tecnored S.A., which provides electric construction and infrastructure services to Chilquinta Energia and third parties, and its 50% interest in Eletrans S.A., which owns, constructs, operates and maintains power transmission facilities.
Chilquinta Energia signed an agreement to purchase the remaining 50% interest in Eletrans S.A. from Sociedad Austral de Electricidad S.A. The closing of this transaction, which will enable Sempra Energy to transfer 100% ownership of Eletrans S.A. to SGID, is contingent on the closing of the sale of Sempra Energy's Chilean businesses and will not change the economics of the transaction for Sempra Energy.
The sale to SGID is expected to be completed in the first quarter of 2020, subject to customary closing conditions, including approval by the Chilean anti-trust authority, certain Chinese regulatory approvals, and approval by the Bermuda Monetary Authority.
In a separate deal, Sempra Energy recently sold its Peruvian assets to another Chinese entity, China Yangtze Power International (Hongkong), a unit of China Three Gorges Corporation.
This included its 83.6% stake in Luz del Sur. That sale, which was announced in September, is also expected to be completed in the first quarter of 2020, subject to customary closing conditions, including approval by the Peruvian anti-trust authority and the Bermuda Monetary Authority.
In combination, these transactions will conclude Sempra Energy's planned sale of its South American businesses for combined proceeds of approximately US$5.82 billion in cash. BofA Merrill Lynch and Lazard are serving as financial advisors to Sempra Energy on the sales, and White & Case is serving as legal advisor.
Chilquinta Energia is the third-largest distributor of electricity in Chile. It provides electricity to approximately two million consumers in the regions of Valparaiso and Maule in central Chile, and is also active in the development and operation of electric transmission lines.
SGID, a wholly-owned subsidiary of State Grid Corporation of China (SGCC), is incorporated in Hong Kong as a limited liability company. SGID currently has investments in the Philippines, Brazil, Portugal, Australia, Hong Kong, Italy and Greece.
Beijing-headquartered SGCC is the world's largest power utility corporation, and has extensive experience in both the construction and operation of electricity transmission and distribution networks. The company's power grid network covers 26 provinces in China. The company is also an important player within the Belt and Road Initiative, including across Latin America.
In Brazil, a 2,500-kilometer UHV transmission line built by State Grid completed its final tests in September. The line runs from the northwestern state of Para, which has extensive hydro power facilities, to the population centre of Rio de Janeiro.
China also has strong ties with Chile. In 2005, Chile became the first Latin American country to sign a free trade agreement with China. In 2017, China and Chile upgraded the agreement, and this updated version of the FTA came into force this year.
In November 2018, Chile's Foreign Minister Robert Ampuero and He Lifeng, president of the National Development and Reform Commission, signed a cooperation agreement within the framework of the Belt and Road Initiative.
And in April of this year, Chilean President Sebastian Pinera attended the second Belt and Road Forum for International Cooperation held in Beijing.
China is Chile's biggest trading partner, and its influence has been growing in a country which has traditionally been regarded as being within the US sphere of influence.
China is a major importer of copper, and exports its electric buses to Chile. And in July this year, the Silk Road Fund participated in an US$880 million acquisition in Chile’s aquaculture industry.
Joyvio Group and Silk Road Fund as co-investor launched a successful takeover bid for 95% of Chilean salmon farmer Australis Seafoods.
This latest deal with Chilquenta is not without political risk. Chile has long been regarded as one of the most stable countries in South America, but the past week has seen rioting and looting aross the country in a wave of protests which began when the capital city Santiago pushed through fare increases on its metro system.
During the rioting, a building belonging to Enel, the largest private electricity generation and distribution company in Chile, went up in flames.
State Grid will find itself in the spotlight as a high-profile foreign buyer of Chilquenta at a sensitive time when cost of living protests are focused on household expenditures such as water, gas and electricity, as well as metro fares.