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Three Gorges Is Planning to Scale Back Its $10.3 Billion EDP Bid

Three Gorges Is Planning to Scale Back Its $10.3 Billion EDP Bid

(Bloomberg) -- China Three Gorges Corp. is planning to scale back its 9.1 billion-euro ($10.3 billion) takeover offer for EDP-Energias de Portugal SA amid concerns about political hurdles and valuation, people familiar with the matter said.

The state-owned firm is evaluating smaller alternative transactions that exclude U.S. assets of EDP, which are the most likely to trigger regulatory opposition, the people said, asking not to be identified because the information is private. It has been exploring potential deals that would boost its exposure to EDP’s international operations, they said.

Three Gorges is considering investing in some of EDP’s Brazilian assets or forming a joint venture in the country, the people said. Deliberations are ongoing, and no final decisions have been made, they said.

The Chinese power giant has been reassessing the merits of its proposed EDP takeover after a sudden leadership change at Three Gorges, Bloomberg News reported in November. Increased political and regulatory scrutiny of Chinese investment in Europe and the U.S., as well as a lingering trade war, have also contributed to the lack of progress on the deal, people with knowledge of the matter said at the time.

Pursuing a smaller transaction could allow Three Gorges to walk away from a full takeover offer while still gaining some assets, blunting potential criticism about a failed deal pursuit. Any changes to the transaction would require signoff from Chinese regulators, the people said.

Representatives for Three Gorges and EDP declined to comment.

Shares of EDP gained 1.9 percent to 3.48 euros in Lisbon trading Friday, giving the firm a market value of about 12.7 billion euros. That closing price is 6.7 percent higher than Three Gorges’s offer of 3.26 euros per share.

Portugal’s securities regulator said on Friday that the bid may end if EDP’s annual shareholder meeting on April 24 rejects a proposal to remove a cap on voting rights, which was a condition set by Three Gorges. If shareholders decide to remove the cap, the regulator will give Three Gorges 45 calendar days to meet all the other conditions set for the bid. EDP’s bylaws limit voting rights to 25 percent and decisions on changing bylaws must be approved by two-thirds of the votes cast at a shareholder meeting.

Activist Pushback

Elliott Management Corp. has also argued that the Three Gorges offer undervalues EDP. The activist investor has urged EDP to instead sell assets, including its controlling stake in EDP-Energias do Brasil SA, and spend the proceeds on its renewable energy business, debt repayment and share buybacks.

Three Gorges, formed more than two decades ago to build a hydroelectric dam on the Yangtze River, began acquiring a stake in EDP more than five years ago as part of a Portuguese government bailout. The two companies have since cooperated in markets such as Europe and Brazil. The Chinese firm is EDP’s largest shareholder, with a 23 percent stake.

Three Gorges in May bid to boost its holding in EDP to above 50 percent. The Chinese company simultaneously offered to buy out EDP Renovaveis SA, the renewable energy unit controlled by EDP that has most of its business in the U.S. Both offers were rejected as too low.

European officials may raise concerns about China’s growing influence over Portugal’s power generator and grids, people with knowledge of the matter said in November. State Grid Corp. of China already holds partial ownership of the operator of Portugal’s electricity and natural gas grids, REN-Redes Energeticas Nacionais.

--With assistance from Joao Lima, Dinesh Nair and Aibing Guo.

To contact Bloomberg News staff for this story: Manuel Baigorri in Hong Kong at mbaigorri@bloomberg.net;Vinicy Chan in Hong Kong at vchan91@bloomberg.net;Steven Yang in Beijing at kyang74@bloomberg.net;Rodrigo Orihuela in Madrid at rorihuela@bloomberg.net;Ruth David in London at rdavid9@bloomberg.net

To contact the editors responsible for this story: Fion Li at fli59@bloomberg.net, ;Jessica Zhou at jzhou75@bloomberg.net, ;Daniel Hauck at dhauck1@bloomberg.net, Ben Scent, Amy Thomson

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With assistance from Bloomberg