GE is forming an alliance with China’s XD Electric Group in a deal that combines the US conglomerate’s electrical grid solutions and distribution capabilities with the Shanghai-listed firm’s equipment technology and large home market.
The global partnership has two aspects. GE will pay Rmb3.38 billion ($535 million) for a 15% stake in the Xian-based manufacturer of electricity transformers and breakers, and will also form a joint venture with XD to develop transmission and distribution, and automation solutions.
“The transaction is a blueprint for future link-ups between multinationals that want to gain access to a vast and growing market, and Chinese companies that are moving up the value chain and need to expand overseas,” said a person familiar with the deal. “It is difficult for foreign firms to take control of Chinese companies, so this is the next best option for them,” he added.
GE, which was advised by Citi, is paying Rmb4.4 for each of 768.9 million new shares issued by XD, at a multiple of 13 times broker estimates of 2012 Ebitda and 10 times 2013 Ebitda. The state-owned Chinese enterprise, advised by CICC, made a loss last year, but has a leading local market position.
XD’s shares rose by nearly 10% to Rmb4.33 after the announcement of the deal, while GE’s shares drifted slightly lower.
The benefit to GE lies in its access to a source of primary equipment technology that it can deliver to its international client base as part of its turnkey solutions model. Meanwhile, XD can make use of the GE brand to increase export revenues at a time when the Chinese economy is expected to decelerate.
GE will appoint a representative to XD’s board of directors and the deal is expected to clear regulatory hurdles by the beginning of October. The Connecticut-based company will pay renminbi for the stake, and a source said that it will have no difficulty raising the funds in the Chinese currency.
The second leg of the transaction is the formation of a joint venture between the two companies, that will allow GE to gain entry to China’s growing power transmission and distribution market that is currently dominated by domestic players.
GE will contribute Rmb258 million for a 41% share in the venture and XD will provide Rmb371 million for a 59% share. The alliance has a planned investment of Rmb1.26 billion under a 30-year contract.
“This is the beginning of an important relationship between two companies with complementary product lines and commitments to technology. It will enhance GE’s ability to provide end-to-end transmission and distribution solutions and expand our presence in the fastest growing regions in the world,” said Bob Gilligan, president and CEO of GE’s digital energy business.
Zhang Yalin, chairman of the XD board, added that the “partnership is a good match that aligns with industry trends to provide the customer with world-class end-to-end transmission and distribution solutions”.
The electricity transmission and distribution industry is worth about $100 billion worldwide, according to UBS Investment Research, and is expected to grow further as emerging nations become more affluent. China represents approximately 25% of the industry’s forecast expansion, and is a leader in the deployment of high and ultra-high voltage technology.
“China is no longer a low-cost manufacturer, and it needs to import know-now and export its own technology,” said the person familiar to the deal.
“From GE’s perspective, the transaction demonstrates the company’s flexibility, and its recognition of the unique conditions that characterise the Chinese market.”
Chinese inbound M&A flows by value dropped 83% in the first quarter of this year compared to the same period in 2011, according to Deloitte China, and volumes fell by more than a half. The firm attributes the decline to the eurozone crisis. However, it points out that 31 inbound transactions were announced during the first three months of the year, the same number that came to market in the previous quarter.
