Chinese wastewater acquisition raises eyebrows

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A major electricity company has bought into the Chinese wastewater market through a $102 million acquisition. The circumstances of the deal are shrouded in controversy, reports Kathy Liu.

State-owned electricity generation company China Guodian Corporation (CGC) has been lured by the growth promised in China’s wastewater sector, announcing in January that it will acquire a 70% stake in state-owned Shenyang Zhenxing Environmental Protection Company (SZEP).

SZEP announced in November that it would be selling off a 70% stake held by Shenyang Water Group, and courted offers starting from RMB505 million ($74 million). Two offers were received by the 13 January deadline, and the following day there was surprise when it was announced that CGC’s bid of RMB700 million ($102 million) had been picked over Beijing Enterprises Water’s substantially higher offer of RMB1.043 billion ($153 million). According to SZEP, the bids were rated using a points system out of 100, broken down into several categories, including the bid price (50 points) and company strength (20 points). The final scores were not disclosed. The full RMB505 million ($74 million) asking price was requested by SZEP as a good faith deposit – an unusual move which excluded most potential buyers, since the tender deposit would normally not exceed 2% of the asking price. To add to the controversy, SZEP required the deposit to be paid within three days, having issued the request on 25 December 2009, which coincided with the Christmas holiday period when most banking institutions are shut.

The circumstances have led some observers to speculate that CGC and SZEP had planned the outcome of the deal from the start, and that the bid from BEW may have been unexpected.

Although CGC has no experience in the water sector – it is one of the five biggest state-owned power groups, accounting for 21% of China’s power generation market – the company does have a need for reclaimed water for use as cooling water in its power plants. At the end of November 2009, CGC’s total assets were worth RMB413 billion ($60 billion).

SZEP, meanwhile, is the biggest wastewater treatment company in northeast China, serving the provinces of Liaoning, Heilongjiang and Jilin. Its revenues were RMB200 million ($29 million) during 2008. The company operates six wastewater treatment plants with a total capacity of 1,170,000m3/d and has five more plants under construction, which when completed will bring the company’s total treatment capacity to 2,000,000m3/d.

The deal is an indication of the increasing interest in the Chinese wastewater sector. At the end of 2009, the average domestic wastewater treatment tariff throughout China was $0.10/m3, while the central government’s target is $0.12/m3 . This represents an average potential revenue growth opportunity of 20% – more than enough motive for an ambitious power company to elbow its way into a new industry segment.