This could be seen as a hedge against the Russian gas monopoly and the massive European debt
- DEALS & DEAL MAKERS
- AUGUST 9, 2011
China Closes In on European Gas
PARIS—GDF Suez SA is close to a deal in which China Investment Corp. would take a stake in the energy company's exploration-and-production business, marking yet another investment by Beijing in Western energy assets and boosting the French company's exposure to the energy-hungry Asian market.
Under the proposed deal, the Chinese sovereign-wealth fund would take a 30% stake in the exploration-and-production business for as much as €3 billion ($4.28 billion), a person familiar with the matter said.
GDF Suez could announce the deal, which its board has yet to approve and could still fall through, as early as Wednesday when the French company reports earnings.
The agreement also lays the groundwork for CIC possibly to invest with GDF Suez in future operations, such as electricity generation, across the Asian-Pacific region except China, the person said. CIC is subject to limits on investing in Chinese assets.
CIC also would help GDF Suez land contracts in China, the person said. CIC didn't respond to requests for comment.
GDF Suez CEO Gérard Mestrallet sees a 'golden age' of natural gas.
CIC has been investing heavily in Western energy and resources since 2009 as a hedge against inflation and to meet the energy needs of the world's fastest-growing economy.
In March of last year, the fund invested $1.6 billion for a 15% stake in AES Corp., a Virginia-based power company. A few months later, CIC invested $416 million in Calgary, Alberta, oil-sands company Penn West Energy Trust and $200 million in Oklahoma City's Chesapeake Energy Corp.
The Chinese $410 billion sovereign-wealth fund earned an 11.7% return on its overseas portfolio last year as it deployed almost all of its capital and accelerated investments into high-risk assets.
Chinese energy companies also have been investing, or trying to invest, in Western assets recently. Cnooc Ltd. last month agreed to spend $2.1 billion for bankrupt Canadian oil-sands developer OPTI Canada Inc. In June, PetroChina Co. and Canada's Encana Corp. called off a $5.5 billion partnership to develop a large tract of natural gas when they couldn't agree on terms.
The proposed deal is part of GDF Suez Chief Executive Gérard Mestrallet's plan to sell roughly €10 billion in assets by 2013 to reduce debt, focus on organic growth and boost the company's presence in the Asia Pacific region.
GDF Suez's exploration-and-production business, which focuses largely on natural gas, accounted for €1.59 billion, or 1.9%, of the company's revenue last year.
The capital-intensive nature of locating and extracting oil and gas means that allying with a sovereign-wealth fund makes sense, analysts say, especially if GDF Suez is looking to lighten its debt load.
GDF Suez has exploration and production activities in Australia and Indonesia but the majority of the business is located in Europe and North Africa.
Mr. Mestrallet has said the world is entering a "golden age" of natural gas, spurred in part by the discovery of large fields of shale gas and fears over the viability of nuclear energy after the Fukushima power-plant disaster in Japan. Global consumption of natural gas could rise by more than 50% over the next 25 years, according to the International Energy Agency.
China is a huge market for natural gas as the country's electricity needs soar and Beijing looks to reduce the use of high-polluting coal. But GDF Suez has been reluctant to invest in electricity production on its own in China, concerned over the lack of stable regulatory and investment environments.
GDF Suez, born of a 2008 merger between French utility giants Suez and Gaz de France, is looking to sell assets in the next two years in part to reduce debt from a $2.25 billion deal in February to merge international assets with the U.K's International Power PLC.
The planned deal with CIC was first reported Monday in French daily newspaper Les Echos.
GDF Suez shares closed at €19.82 ($28.30), down 59 European cents, on Monday in Paris amid sharp declines world-wide.
Write to Max Colchester at max.colchester@wsj.com
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