Takeover veto Berlin planning limits on Chinese investment

Stealth acquisition in gas and utility networks is spurring plans to lower the threshold at which the government can veto foreign takeovers of sensitive German firms.
Powering Germany, empowering China.

The Berlin government is scrambling once again for ways to limit Chinese investment in sensitive firms after it emerged that Beijing had acquired a significant stake in a German utility network through the back door.

State-owned China Southern Power Grid recently acquired a stake of more than 25 percent in the Luxembourg utility holding company Encevo, according to the seller, the Ardian private equity group. Encevo’s Creos unit operates a 1,650-kilometer (1,025-mile) gas distribution network in western Germany as well as a 420-kilometer high- and medium-voltage network. Its main business is management of energy networks.

The acquisition, coming just days after Berlin thwarted a Chinese acquisition in the 50Hertz grid operator, has prompted the government to consider measures such as lowering the threshold for review and potential veto of foreign acquisitions for national security reasons. That threshold, which currently stands at 25 percent of shares, may be cut to 15 percent, government sources told Handelsblatt.

Dual objectives

China’s two-pronged strategy has been to secure stakes in important infrastructure throughout the world while also expanding its high technology capacity in line with its “Made in China 2025” plan. The strategy has become so controversial abroad that the Beijing government has banned any reports about it in domestic media.

The revised German law would also permit government review if an initial investment under 15 percent was followed by a subsequent acquisition that took the overall stake above 15 percent. But the powers of review would be strictly limited to firms linked to national security and the government would remain powerless regarding stakes less than 15 percent.

The proposed change leaves open the question of what happens when a Chinese firm seeks to make an acquisition through a European subsidiary, for example automaker Geely and its Volvo subsidiary in Sweden. Michael Theurer, a leader of the opposition Free Democrats in parliament, called for clarification of the criteria for a security review.

Another tactic to block investment would be for the International Monetary Fund or some other finance agency to become more active in shielding European firms. “Would it make sense to set up a European investment fund for cases in which a company should remain in European hands, whether for security or economic reasons?” asked Jan Weidenfeld, head of the European China Policy Unit at the Mercis think tank in Berlin.

Berlin blocked the Chinese investment in 50Hertz with the help of the German development bank KfW. It took over a 20-percent stake sought by China after majority owner Elia exercised its right of first refusal to buy the stake and immediately sold it on to KfW, which will hold it temporarily.

Mindful of possible retaliation by China, German industry urged the government to be careful in restricting investment. The industry lobby group BDI called for Berlin to keep a proper “perspective” when setting obstacles, while the German Chamber of Commerce (DIHT) warned of “barriers in other countries” if rules were too strict.

Dana Heide covers the economics ministry for Handelsblatt and Thomas Sigmund is the Berlin bureau chief. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the authors: [email protected] and [email protected].