AES Debate: China's Infrastructure Grab (AES)

China is at it again buying key infrastructure access.  AES Corp. (NYSE: AES) disclosed on Friday, along with earnings, that the company was raising significant cash.  This is a capital raise which also may ‘raise some eyebrows’ because the company is selling a 15% stake to China’s sovereign wealth fund, China Investment Corporation.  The stake sale will bring in $1.58 billion for expansion of global projects.  AES also announced a Letter of Intent to sell a 35% minority stake in its global wind generation business valued at $571 million on top of the stake sale.

AES is a key infrastructure play as the Arlington, Virginia-based company is into electric power generation and distribution in Asia, North America, Europe, Latin America, and Africa.  This would raise a red flag, no pun intended, except that AES provides power in 29 countries and the lion’s share of its revenue comes from outside of the U.S..  That will probably keep most U.S. regulators at bay.

China Investment Corp. will buy 125.5 million common shares of AES Corp. at a price of $12.60 per share.  There were rumors that China was interested in the company during the last 60 days and the terms and level of interest were up for debate.  China Investment Corp will also get a seat on the AES board of directors.  The company has targeted the required government approvals to be secured in the first half of next year.

What is interesting here is that this is a quasi-dollar-exit.  AES is a US company, but over two-thirds of its revenues are international and in areas where China has some presence.  Because of the approximate $300 billion size of China Investment Corp. and adding in the near-$2 trillion China has in foreign currency reserves, it is hard to say this is a sudden departure.  But we have noted on many occasions how China is gathering up oil and energy assets globally, and that is a dual-purpose effort: securing its own natural resources and reserves AND getting off the US Dollar dependence.  Neither will happen immediately, but this seems fairly easy to see where it is heading over the long haul.

AES’s stance is that this move will allow the company to unlock the value of its  development pipeline and will bolster its balance sheet to allow for more acquisitions and expansion projects as it seeks renewable energy projects and more developments in emerging markets.

While AES reported that its revenue fell to $3.8 billion from a level of $4.3 billion a year ago (mostly due to currency rates), its income grew to $185 million from $145 million.  The company raised 2009 guidance to $1.09 EPS versus a prior target of $1.08 but against a Thomson Reuters figure of $1.10 EPS.  But this is not an issue over earnings.  This is an issue of the great global land and asset grab.

China may be learning to bargain better than even Warren Buffett in its deal-making for stakes in the company.  The $12.60 price was a discount to the Thursday close of $13.86 and even lower than the $14.03 close on Friday.  While the year-high is $15.44, AES traded between $20 and $25 for most of 2007 before the world took a hard turn south in 2008.

China is often referred to as a nation that can execute on 100-year plans.  Based upon the valuation of AES and its international operations, it seems China just got into a global infrastructure play on the cheap.  Because of the international focus of AES, it seems that CFIUS, or Committee on Foreign Investment in the United States, will have  to rubber-stamp the investment here.

JON C. OGG