China Shenhua and Guodian merger will create an energy titan

China Shenhua and China Guodian Corporation have reportedly submitted a merger proposal to the State Council. If sanctioned, the new company will become an energy titan – the world's biggest power utility (installed capacity topping 225 GW) as well as the biggest wind power developer (33 GW) and the biggest coal producer. The merger is mutually beneficial. Shenhua can fast-track its 2020 power capacity target through the merger, diversify its fuel mix towards more clean energy and mitigate power price risks by leveraging subsidies for renewables. Guodian can benefit by accessing Shenhua's lower-cost coal and integrated transportation infrastructure. More importantly, it can reduce its debt levels using Shenhua's cash piles. We expect more consolidation to follow as the government is keen to push reform among state-owned enterprises. But how to work towards more synergies is a key question.