The German government has blocked efforts by State Grid Corporation of China (State Grid) to acquire a 20% shareholding in one of the country’s biggest electricity transmission companies. The stake in 50Hertz is instead being bought by state-owned promotional bank Kreditanstalt fur Wiederaufbau (KfW).

Chinese investment in critical infrastructure is a sensitive issue for the German government. However when last year it amended its foreign investment law to subject deals to tougher scrutiny, it set the threshold for a review at 25%.

But in this case Germany was able to freeze out State Grid without explicitly vetoing the deal. This was because the 50Hertz majority shareholder had the right of first refusal. It has now exercised this option after which it immediately sold the stake to KfW.

A July 27 statement from Belgian transmission system company Elia System Operator said that it had exercised its pre-emption right on the remaining 20% stake in Eurogrid International, the holding company of 50Hertz Transmission GmbH. It added that it had sold the stake to KfW on the same financial conditions.

“The transaction between Elia and KfW fosters Belgian-German cooperation regarding critical grid infrastructure,” the company said. “50Hertz is one of four electricity TSOs in Germany and is playing an important role in the implementation of the 'Energiewende' or energy transition in Germany.”

The change in Eurogrid's share ownership followed a notification received by Elia in May 2018 from IFM Global Infrastructure Fund, an Australian investment management company, of an agreement with a third party for the acquisition of IFM's remaining 20% stake in Eurogrid.

Elia had already acquired another 20% share package from IFM in April 2018. Having boosted its stake to 80%, Elia said that it had already achieved its objective to fully control 50Hertz in order to realise the complete potential for its growth strategy and reinforce its role as a leading group of TSOs in Europe.

When in February of this year IFM Investors put half of its 40% stake in 50Hertz up for sale, State Grid had made a bid, but Elia exercised its option. Though it was a commercial decision, there was speculation in the German press that the German government held behind the scenes discussions with the Belgian government, encouraging Elia to step up and help block the SGCC move.

When the second IFM shareholding was put up for sale, Elia was less enthusiastic, saying any decision would take Elia’s aim of maintaining a strong investment grade rating into consideration. It explained that from a strategic and financial perspective, the acquisition of the shares by Elia at similar financial conditions as the first 20% stake wasn’t considered a necessity.

Following the deal with KfW, IFM will no longer be a Eurogrid shareholder. Elia and IFM acquired 50Hertz in 2010, after it was put up for sale by Swedish company Vattenfall.

Chris Peeters, CEO of Elia Group, said that as a leading company in the energy sector, 50Hertz is very closely connected to the German society that it serves. Elia, as main shareholder, looks forward to having KfW as its new partner and “feels confident that this stronger national anchorage will inspire us to continue building the infrastructure to realise the energy transition in Germany.”

The deal with KfW sends a strong signal to China that attempts to acquire critical infrastructure in Germany are not welcome.

50Hertz Transmission is one of the four transmission system operators in Germany and owns and operates the electricity grid in the states of Thuringia, Saxony, Saxony-Anhalt, Brandenburg, Berlin, Mecklenburg-Western Pomerania, and Hamburg.

Each of the four transmission system operators is responsible for balancing electricity feeding and take-off in their respective service territories. In the past there were situations where a power surplus in one of the service territories and a power deficit in another were regulated independently of each other. Since May 1 2010, the four transmission system operators have joined forces and cooperate on a system control platform called Grid Control Cooperation (GCC). Balancing operations in the respective service territories are now jointly controlled based on an overall picture view, which saves control power and makes electricity supply in Germany even more secure.

50Hertz distributes power to more than 18 million people and companies. That puts it firmly into the category of critical infrastructure, an area where the German government has made it clear that it has concerns about investment from China.

A July 27 statement from KfW said that following the exercise of pre-emption rights between Elia and IFM, KfW is acquiring 20% of the shares of Eurogrid International CVBA on behalf of the German Federal Government. Eurogrid International CVBA indirectly holds 100% in 50Hertz.