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Chinese Power Company Makes $3.4 Billion Bet on Solar Energy

Hong Kong-listed Chinese power company GCL-Poly Energy Holdings yesterday announced that it will pay HK$26 billion ($3.4 billion) to acquire Jiangsu Zhongneng PV Technology Development, a supplier of polysilicon used in solar panels. The chairman of GCL-Poly, Zhu Gongshan, is also the owner of Zhongneng and by absorbing the target into the listed company, Zhu and his associates will become GCL-Poly's majority shareholder.

Most of the deal will be funded by GCL-Poly issuing approximately 10 billion new shares to the sellers at a price of HK$2.20 each, or a total of $2.8 billion. The price represents a 12% discount to the company's share price before trading was suspended on June 4, pending the announcement of the deal.

When trading resumed yesterday, the stock went up by 15.2%, to HK$2.88. But even before yesterday's boost, the share price had already performed well: between mid-March and the suspension in early June, it more than quadrupled.

In addition to the new shares, GCL-Poly will also issue $350 million worth of secured notes to the vendors and pay $200 million in cash to pay for the remainder of the deal.

The new shares represent 885% of GCL-Poly's existing share capital, and 81.8% of the company after the allotment. Upon completion of the transaction, Zhu will see his stake increase to 56.2% from 34.5%. The company's second largest shareholder, Morgan Stanley, will be diluted to 1.5%, from its earlier holding of 15.7%.

GCL-Poly is a major operator of cogeneration power plants in China. Cogeneration plants siphon the heat emitted in the creation of electricity and use it for domestic and industrial heating, rather than putting it back into the environment as a waste product. At the end of 2008, the company had 19 operational subsidiaries and associated power plants, most of which are located in the Chinese provinces of Jiangsu and Zhejiang.

All of the company's power plants benefit from the Chinese government's efforts to promote clean energy—such as higher on-grid tariffs and preferential tax treatment. The company intends to increase its interests in clean and renewable fuels, including solar technology, according to a stock exchange filing.

"The directors consider that the acquisition will facilitate the group's access to technology for large-scale renewable energy-related operations, after which the group may then further develop its operations in the renewable energy industry," the company said in the filing.

GLC-Poly holds that solar power is the fastest growing source of renewable energy, citing statistics from the European Photovoltaic Industry Association which show that total global solar capacity has risen to 14.7GW in 2008 from 1GW in 1998.

Zhongneng's production facilities are located in Xuzhou, Jiangsu province. It is one of China's largest suppliers of polysilicon and wafers to companies in the solar industry. In the first three months of 2009 it produced 1,094 tonnes of silicon, which translates into an annual production volume of 4,376 tonnes. When the third stage of the Xuzhou facility reaches peak production, which is expected to happen at the end of 2010, annual capacity should reach 21,000 tonnes.

ICBC International Capital advised GCL-Poly on the deal.

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