China spending big to buy Aussie energy assets

Billion-dollar deal a vote of confidence for Australia’s electricity industry.

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The world’s seventh largest company, with annual revenues of US$300 billion, has come looking for a piece of Australia’s energy industry. According to some reports, it’s prepared to spend up to $6 billion to acquire key electricity and gas assets.

In a deal announced late last week, Chinese state-owned company State Grid Corporation of China has agreed to buy a 19.1% stake in SP AusNet (ASX: SPN), the company that operates Victoria’s electricity transmission and distribution network, and last year took home revenues in excess of $1.6 billion. The company will remain 49% publically owned, with the 19.1% stake being sold by current majority holder Singapore Power. The sale is subject to approval from the Foreign Investment Review Board.

Australia is the latest target in a global, five-year acquisition spree by State Grid that has seen the company buying up electricity supply assets and power grids around the world. This includes spending US$531 million to take over seven high voltage electricity transmission facilities in Brazil earlier this year, on top of seven others the company acquired in 2010 for nearly US$1 billion. State Grid also won the rights to take over operation of the Philippine power grid in 2009 for 25 years after a winning bid of US$3.95 billion. State Grid aims to hold 20% of its assets outside of China by 2020.

The SP AusNet deal places timely emphasises the attractive investment case of the Australian energy market. In the deal’s announcement, Singapore Power noted the confidence for SP AusNet’s future stemming from Australia’s “resilient economy with a transparent regulatory framework.”

The move on Australian assets may be of particular interest to Origin Energy (ASX: ORG), which is looking for a buyer for the company’s gas pipeline built to support the APLNG project. China’s biggest company (and the world’s fifth largest) Sinopec Group is a 25% partner in APLNG so it wouldn’t be a stretch to see a deal being done if State Grid was interesed.

Foolish takeaway

A resilient and transparent industry is fertile hunting grounds for long-term investments, a feature that has not gone by un-noticed by big international players like State Grid. This will likely place greater focus on Australia’s other energy companies including AGL Energy (ASX: AGK), Origin, and gas infrastructure company APA Group (ASX: APA).

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