National security fears and intervention thresholds: a 21st century powder keg

Watching the German government tie itself in knots to prevent China State Grid buying into 50Hertz drove home how inadequate its laws are.

When your country’s foreign investment laws aren’t strong enough to protect national security and you need to use your development bank to fend off an unwanted bid, you know the status quo is deeply broken.

That’s what happened last week, after the German government’s tortuous manoeuvring saw majority shareholder Elia use its pre-emption rights to neuter China State Grid’s bid for the remaining 20 percent of transmission operator 50Hertz. It then immediately sold the stake to German development bank KfW, an unlikely buyer and itself only a temporary custodian, since it plans to offload it to a more suitable investor.

Is your head spinning yet?

The reality is, Germany had very little choice considering it wanted to prevent IFM Investors from selling its remaining interest in 50Hertz to an unwanted buyer. That’s because the 20 percent the Australian manager was offloading fell below the 25 percent threshold required for the government to be able to intervene in the deal, per its foreign investment laws.

State Grid had already come knocking earlier this year, prompting Elia to first use its pre-emption rights to buy the initial 20 percent IFM was selling for a cool €976 million. When it came knocking again for the remaining 20 percent with another €1 billion cheque – apparently, the only participant in this second auction – it put IFM and the government between a rock and a hard place.

A month ago, we wrote that investors need to be careful about who they exit to, lest they create odd bedfellows, potentially burning bridges with old partners in the process. We mostly had private-to-private exits in mind when we wrote that, but it’s easy to see this was a move where stakeholder interests were definitely not aligned.

We’re not pointing the finger at IFM – come exit time, its fiduciary duty is to maximise value for its stakeholders and it clearly felt the best way to do that was to break its 40 percent stake in half. Considering it had a cash-rich, state-backed buyer helping to drive up the price, IFM probably got a very good deal out of 50Hertz.

For Elia, which already owned 80 percent of 50Hertz, acquiring the final 20 percent for another €1 billion would have been a pricey redundancy. As for KfW, this is so clearly not its cup of tea it essentially put its hands up and, like Shaggy, declared “It wasn’t me”, stressing it “does not assume any entrepreneurial or strategic responsibility for the transaction”.

But it’s the German government that comes off worst, because it, like many of its fellow European governments (and beyond), currently has a system that equates threat with level of ownership. As 50Hertz clearly illustrates, though, Germany wasn’t concerned about State Grid being able to one day threaten to turn off the lights for diplomatic leverage – it was concerned about having State Grid in the building. And when your primary concern is to prevent someone from entering the building, then the easiest way to avoid that is to do away with intervention thresholds. That is, legislate so government can intervene whenever it deems national security is at stake, no matter the size of the stake being sold.

Needless to say, this risks irredeemably politicising the free-market system. Still, when that system is struggling to address 21st century challenges, you know it’s ripe for change. Think this all sounds a bit far-fetched? Maybe. But to borrow a turn of phrase from the Guardian’s Marina Hyde, we’re running out of storage space for all the ‘never-would-happens’ we’ve been stockpiling over the past two years.

Write to the author at bruno.a@peimedia.com