Germany blocks China State Grid bid for 50Hertz, citing ‘national security’ fears

The government uses development bank KfW to buy 20% of the transmission system operator to prevent the state-backed firm taking a stake in the country’s ‘critical energy infrastructure’.

The German government has taken an unprecedented decision to use state development bank KfW to indirectly buy 20 percent of regional transmission system operator 50Hertz from IFM Investors to prevent China State Grid from buying into the company.

KfW has acquired the stake as a “temporary measure” with the intention of selling it to a new investor in the future. It bought the share from Belgian operator Elia, which owns 80 percent of 50Hertz, which used its pre-emption rights to oust China State Grid from the deal.

The German government was unable to directly intervene in the transaction as its laws for reviewing foreign investment decisions has a minimum threshold of 25 percent. However, the government was explicit in its use of KfW.

“On national security grounds, the federal government has a major interest in protecting critical energy infrastructure,” its finance and economy ministries said in a joint statement. “For this reason, the federal government has decided that KfW should acquire on the Federation’s behalf the 20 percent share of the German transmission system operator 50Hertz which is currently up for sale.”

KfW, which increased its development finance commitments on behalf of the government to €9.7 billion last year, took the unusual step of clarifying that the opportunities and risks from the deal lie with the government and that it “does not assume any entrepreneurial or strategic responsibility for the transaction”.

Elia said that becoming the 100 percent owner of 50Hertz was considered unnecessary “from a strategic and financial perspective” but hailed the “stronger national anchorage” between itself and KfW.

IFM had not responded to a request for comment at the time of publication. It has owned 50Hertz alongside Elia since 2010 as part of its Global Infrastructure Fund.

‘We have no influence’

This is the second time the issue has reared its head in recent months. Elia revealed in February that IFM and China State Grid were in talks, which would have seen the latter acquire 20 percent of the company. The potential transaction generated controversy which ended in March, with Elia paying IFM €976.5 million for the share. The latest deal has been made “at similar financial conditions”, it said.

However, when asked about China State Grid’s initial interest in March, a German government spokeswoman said it was aware of the discussions but insisted that “the federal government has no influence” on such events. She also emphasised the 25 percent threshold for government intervention.

Chinese Premier Li Keqiang and German Chancellor Angela Merkel held talks in Berlin earlier this month. A statement from the Chinese Foreign Ministry following the talks said both sides “stressed the need to welcome two-way investment and promote the liberalisation and facilitation of trade and investment on the basis of mutual benefit and non-discrimination in the spirit of open economy”. The ministry was yet to comment regarding 50Hertz.

Germany is the second most popular destination in Europe – after the UK – for foreign direct investment from China, according to a recent report from Rhodium Group and the Mercator Institute for China Studies. Some €20.6 billion has been invested in the country between 2000 and 2017, although the report found this fell from €11 billion to €1.8 billion in 2017, with the drop attributed to several big takeovers not completed due to regulatory delays.