China deepens Irish ties with Gaelectric deal


December 16, 2016

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There are few similarities between China and the Republic of Ireland. However, the Asian superpower is becoming an increasingly important trading partner for the Irish.

Exports from Ireland to China have doubled over the last five years to almost €8bn a year, while people in China have embraced many Irish clichés: Riverdance, themed pubs and ageing boy bands. An estimated 40,000 Chinese tourists visit Ireland each year.

The relationship between the pair may come under some strain because of negative headlines in the Irish press about human and animal rights in China. But Ireland will be keen to ensure that economic cooperation with the superpower keeps thriving.

And that is why a recent deal in the wind sector in Ireland is significant outside the energy sector.

Last week, CGN Europe Energy, the renewable energy investment arm of China General Nuclear Power group, finalised the purchase of ten operational wind farms and four development projects from Irish developer Gaelectric. Under this deal, Dublin-headquartered Gaelectric will sell 230MW of wind projects on the island of Ireland to CGN. No transaction fee has been disclosed, but the schemes are estimated to have an equity value of up to €350m.

Seven wind farms are located in Northern Ireland and seven in the the Republic, but the deal is significant because it does start to establish a relationship between CGN and Gaelectric; and gives China a stake in the nation’s electricity sector.

Gaelectric is set to provide asset management and power-offtake services to CGN for all the 14 wind farms after their sale. The pair will have to work together on these assets.

China’s interest in Ireland is also relevant given how often we are seeing Chinese firms seeking deals outside of their home market.

The country’s economic slowdown has undoubtedly played a big role in the investment decisions made by Chinese firms. Bejing is fighting to prevent a massive escape of capital from China, after the market turmoil the country experienced in the summer of 2015, when the Shangai Stock Exchange lost a third of its value within a month. And the situation looks still far from improving, as just in the first 10 months of 2016, capital outflows from China rose to $530bn.

In that context, we can see why CGN would want to buy assets with a reliable long-term cashflow while outsourcing the management to Gaelectric. It gets returns without having to manage the projects.

The deal also tells us some interesting things about Gaelectric’s strategy. At first, it could look counterintuitive when considering the firm’s overarching strategy. Last year, the company announced its intention to hit a 400MW target of operational wind farms by 2017 and it is now selling 230MW of its 320MW capacity. Surely that puts it back to 90MW with only 12 months to hit its target?

But Gaelectric chief executive Barry Gavin says this is not the case. He says that selling these 230MW of assets would actually enable it to hit its 400MW target more quickly, and by the end of next year. Selling these projects means that the company can pay down debt, supporting the group’s balance sheet, and helps it to recycle cash in order to quicker hit its target with new deals or acquisitions.

We might well see Chinese companies get more involved in such deals in the year to come.

The International Monetary Fund has forecast that growth in China’s GDP will further slow, to 6.2% in 2017, from the 6.6% expected to be achieved by the end of 2016. It is reasonable then to expect more capital flows and key investments from Chinese companies in the coming months.

Politicians in the Republic of Ireland will hope their country can take advantage by deepening the pair’s current bonds.

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