Nuclear Energy Investing: Chinese Broker Secret Deal
By S.R. Nunnally
In this article
For the past two years, China has been in deep talks with Westinghouse Electric Corporation.
While the details for the Westinghouse deal were being finalized, a second deal worth $5 billion was in the works.
China ultimately wants to increase its nuclear generating capacity to 40 GW by 2020.
Nuclear Energy Investing: Chinese Broker Secret Deal
For the past two years, China has been in deep talks with Westinghouse Electric Corporation, who has since been bought by Toshiba Corp. (TOSBF.PK). Westinghouse manufactures nuclear reactors, among many other things.
In the first quarter of 2007, they finally arrived at a deal. Westinghouse will provide four AP1000 reactors (approximately 4 GW worth of generating capacity) for the sum of $6 billion. The company will begin construction in 2009, and the first reactor will be operational by 2013.
But the story doesn't end there…
Westinghouse won this contract after a two-year bidding competition, and it appeared as though China snubbed some of the other competitors in choosing Westinghouse for all four reactors.
Another big name was seemingly left out in the cold.
You've heard me talk about this company in Market Report before: Areva (CEI:Paris) (ARVCF.PK).
While the details for the Westinghouse deal were being finalized, a second deal worth $5 billion was in the works for another two reactors for an additional 3.2 GW of power generation. The winner? Areva.
Areva also plans to have the first plant operational in 2013.
Nuclear Energy Investing: A Huge Price Tag
Why China and Areva collaborated to keep this second deal quiet is not clear. But it was obvious to the investment community that China would have to step up its construction timeline to meet its nuclear energy goals.
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These goals are extremely ambitious and have a huge price tag.
China ultimately wants to increase its nuclear generating capacity to 40 GW by 2020 (from about 12.5 GW as of January 2007). That breaks down to 30 new reactors, or more than two plants constructed every year until 2020.
The country plans to spend $50 billion in the process.
We now know that $11 billion is already on the table for six new reactors. That leaves $39 billion for the construction of 24 reactors - about $1.625 billion per reactor, or $3.25 billion a year.
Westinghouse and Areva may see more contracts in the future, but don't be surprised to see General Electric (GE:NYSE) thrown into the mix as well.
By the way, the last we heard about the battle for Germany's wind turbine producer, REpower (RPW:XETRA) (RPWSF.PK), was that Areva had upped its bid to $1.5 billion.
Nuclear Energy Investing: Greasing the Wheels
That increase is about 33% higher per share than its original bid and more than 11% higher per share than Suzlon Energy's (SZEYF.PK) (514240:Bombay) bid.
REpower may favor Areva over Suzlon. It's no wonder, though. If Areva can garner $5 billion of China's business on the sly, then it probably has a lot more clout than Suzlon.
REpower's shareholders know that means more business and contracts for them.
Perhaps Areva didn't need to up its bid after all, but you'd better believe it pays to grease the wheels when it comes to M & A.
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S.R. Nunnally is a commodities expert and technical analyst for Taipan Financial News. She is the editor of Material Profits, a monthly newsletter providing in-depth, cutting-edge research in the commodities sector. She is also the founder of Material Profits Wildcatter, employing an elite group of aggressive investment strategies.
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Related Resources
Asia: Country News Review. - The Asian Report
M & A: Areva offers more than Suzlon for German turbine co. - The Hindu Business Line
Nuclear Statistics: World Nuclear Power Generation and Capacity. - NEI.org