In a notable move, the State Grid Energy Develop Corporation (SGEDC), a subsidiary of State Grid, has been 100% acquired by China Shenhua Group, China’s largest coal producer. Founded in April 2008, SGEDC owns eight peak and frequency regulation thermal power plants, consuming 20 million MT thermal coal per year. SGEDC achieved a net profit of RMB 78 million in 2011 and has an asset value estimated at 2.5% of the State Grid’s overall assets.
This looks to be a policy-driven acquisition as it brings State Grid more in line with the National Development and Reform Commission (NDRC)’s instructive policy of “plant and grid separation” and “separating the secondary business.” Meanwhile, Shenhua is looking to expand its power generation business, and the acquisition helps the company to better utilize its sufficient coal resources.
State Grid is going to receive over RMB 60 billion in cash from the deal, likely to be used to fuel investments in developing business in overseas markets. At this point, State Grid has completed foreign direct investments over $5 billion into grid facility operations, the establishment of foreign R&D labs, foreign company acquisitions, and some greenfield investments. State Grid’s president, Mr. Zhenya Liu, has noted that the corporation now has nine representative offices across Europe, North America, South America, and Africa. Importantly, the internal return rate of the State Grid’s oversea assets is three to five times higher than the return on its assets in China. Zhenya has also disclosed that by 2020 the overseas assets State Grid will own are targeted to be 10% of the corporation’s total assets.
As State Grid looks outside the borders of China, opportunities to partner with the SOE giant are certain to grow. Given the deep pockets they bring to the table, there is good reason to engage – but monitor, at a minimum.
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