25 July 2016

Case study: The hunt for top tier assets - State Power Investment Corporation's acquisition of Pacific Hydro Group

In a clear signal towards the ongoing appetite of Chinese investors for quality global assets, China’s State Power Investment Corporation (SPIC) successfully acquired Pacific Hydro Group, IFM Investor’s renewable energy portfolio. The acquisition was one of the largest ever by a Chinese bidder into Australia, and SPIC’s first venture into the country.

Who’s who?

The buyer, SPIC, is one of the five-largest power generation groups in China, with over 100 GW of installed capacity. It has over US$113 billion of generation assets under management across 35 countries and regions including China, Japan, Turkey, Malta, Vietnam, Pakistan and Guinea. KWM acts for SPIC on this successful acquisition.

The target, Pacific Hydro, is an independent, global owner, operator and developer of wind and hydro renewable energy assets. Pacific Hydro has a high quality and diversified portfolio of 19 operating assets across Chile, Australia and Brazil (together with a substantial pipeline of development projects in those markets and a growing electricity retail platform in Australia).

The seller, IFM Investors is (through a combination of its funds) a major infrastructure investor, owned by some of Australia’s largest superannuation funds.

The competitive and complex sale process 

The transaction involved complex cross- border legal, regulatory and transaction management issues.

In particular, as the sale process was very competitive, with a number of bidders remaining through to the last stage, King & Wood Mallesons had to constantly be mindful of balancing SPIC’s need for adequate contractual protections (and to ensure PRC regulatory compliance) against the need to deliver funding and execution certainty for the sellers.

The deal was signed in mid-December 2015 and closed quickly for the Australian/Chilean assets in January 2016. The Brazilian assets are due to close separately later in 2016 (subject to some bespoke regulatory approvals from a rural land authority in Brazil).

Key features of the deal ƒ 

  • Buy-side warranty and indemnity insurance was initially offered by the sellers. However, the sellers subsequently elected not to pursue W&I insurance. This resulted in a renegotiation of the W&I regime (and associated liability caps and collars).
  • ƒAnother key feature of the deal was the quite complex refinancing of existing facilities, which needed to synchronise with closing (together with the replacement of many counterparty guarantees / letters of credit – all parties ended up accepting a Chinese issuing bank which is a welcome development).

FIRB approval and NDRC registration 

Australian foreign investment approval from FIRB was required and obtained without issue. While there were no specific competition concerns, the Australian Competition and Consumer Commission did contact King & Wood Mallesons, seeking detailed information about the relationship between SPIC and all other Chinese state-owned enterprises who had power-related investments in Australia (presumably on the basis that they consider all Chinese SOEs to be associated, similar to FIRB’s current stance). This was overcome by explaining that such information would be practically difficult to collate, that FIRB itself would be aware of all Chinese SOE power-related investments in Australia and, crucially, that Chinese SOEs are often each other’s fiercest competitors and do not have knowledge of each other’s foreign investment activity.

Registration with China’s NDRC was a condition of the sale. Other Chinese regulatory filings and registrations were also required, but not included as conditions (on the basis that SPIC was confident they could manage such administrative filings).

AQ China Outbound Case Study: SPIC's acquisition of Pacific Hydro Group
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A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

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Chinese Outbound Investment 2016

In our second Chinese Outbound Investment report, we analyse trends and delve into several significant policy developments that have – and will continue to – impact on offshore investment.

More importantly, this report looks to the future of Chinese outbound investment.

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