Hedge fund challenges China Three Gorges' EDP takeover bid

It said CTG’s bid for the utility has stalled and has too many regulatory hurdles.

Elliott Advisors (UK), the London-based arm of US hedge fund Elliott Management, slammed China Three Gorges’ $10.3b takeover bid for EDP and said it is the “greatest source of uncertainty” facing the Portuguese utility today.

“Elliott respects CTG and its important role as EDP’s largest shareholder,” the fund manager’s public letter to EDP chairman Luis Amado said. “However, Elliott does not consider CTG’s bid — in its current form — to be in the best interest of EDP’s stakeholders and believes the existence of CTG’s bid is hindering EDP’s performance. In Elliott’s view, CTG’s bid, if consummated, will leave the company weaker, more volatile, and with a less attractive portfolio and diminished growth opportunities.”

Elliott Advisors (UK) holds a 2.9% of the common stock of EDP and is one of its top shareholders. CTG currently owns 23% of EDP and is its top shareholder.

Elliott noted that the price of CTG’s current bid of EUR3.26 per share is too low and significantly undervalues EDP. Upon the announcement of CTG’s bid on 11 May 2018, Elliott said the bid was met with “immediate scepticism.”

Also read: Is China Three Gorges' US$10.8b bid for Portugal's EDP Renovaveis falling apart?

“The most obvious problem with the bid is the unacceptable 4.8% premium. As detailed by the EDP Executive Board in June 2018, typical premiums range from 27% to 40%,” it said, arguing that the company’s fair value should result in a share price of EUR4.41 per share and the bid should be around EUR4.66 per share.

“CTG’s takeover Bid in its current form not only undervalues EDP but would also force an unattractive break-up and the loss of EDP’s most valuable assets, given the myriad of regulatory approvals required,” Elliott added.

The fund manager also cited several regulatory hurdles that include obtaining the approval of fifteen different anti-trust, foreign investment, energy, and other regulatory bodies as well as the required condition that is an amendment to EDP’s bylaws to lift an existing voting interest cap.

To date, sixteen of the seventeen major conditions precedent to clear the deal remain unresolved, with only one anti-trust approval received after nine months. Moreover, 278 days have passed since CTG announced its takeover bid, whereas the average deal takes 68 days between announcement and European Commission (EC) filing.

Also read: China Three Gorges drops talks with regulators for EDP buy: report

Whilst no clear steps have been taken to resolve these outstanding issues, one typical approach to avoiding regulatory roadblocks would be for CTG to divest key parts of the portfolio, Elliott noted. “EDP would likely need to divest its U.S. renewables portfolio. Similar regulatory challenges related to unbundling would likely require divestments of all of EDP’s Portuguese generation portfolio.”

According to the fund manager, the sale of EDP’s portfolio in these two locations would leave it weaker. EDP’s business includes “one of the most attractive” US renewable energy platforms and North America represents 17% of EDP’s EBITDA.

“It is clear to us that CTG’s bid is not in the best interest of EDP’s stakeholders. The price is too low, the process is stalled, and the likely changes required by CTG’s bid would be driven by regulatory conditions, rather than the best interests of all stakeholders,” Elliott said. “We believe that EDP must move beyond this bid quickly and that the process of charting a new course is long overdue.”