By Stephen Jewkes

China's state power grid is one of two bidders for a large stake in Italy's energy grids, but such a link could create problems because the Chinese and Italians both aim to buy assets around Europe, sources with knowledge of the matter said.

As part of a privatisation drive to cut public debt, Italian state lender Cassa Depositi e Prestiti (CDP) is trying to sell up to 49 percent of CDP Reti - the vehicle that controls gas grid Snam and soon power grid Terna.

Sources told Reuters that State Grid Corporation of China (SGCC) and Australia's Industry Funds Management (IFM) were the only suitors interested in buying a significant stake, though they did add CDP was also seeking investment funds to buy smaller stakes.

Failure to find a deal with potential investors on governance of the grid vehicle could put such a sale at risk.

"Terna initially was not over the moon. An operator like that can't be happy about having an industrial rival in its shareholder base, since potential conflicts of interest could crimp overseas ambitions," a source close to the matter said.

CDP and SGCC declined to comment, while officials at IFM could not immediately be reached for comment.

CDP had initially planned to raise the proceeds by the end of June, but the sale process is taking longer than planned.

Terna, one of Europe's biggest power grid operators with 63,000 kilometres of high-voltage lines, is interested in Greece's plans to sell a 66 percent stake in power grid company ADMIE, which operates an 11,000 km power network. Sources say SGCC is also in the race.

"Terna is interested in the Greek grid, but it doesn't have the easy money the Chinese have, and it certainly can't afford to buy as big a stake as them," a source close to the company said.

Rome supports Snam's ambitions to be a leading player in the integration of Europe's gas transport grid to turn Italy into a gas hub and has indicated Terna also could do a similar thing in power.

SGCC, the world's biggest state utility, aims to more than quadruple its overseas assets to between $30 billion and $50 billion as it seeks to diversify away from the domestic market for higher returns.

The company, whose foreign investment is focused on power grids and electrical appliance manufacturers, bought a 25 percent stake in Portuguese power grid operator REN two years ago and has said it will invest further in European utilities if the price is right.

China's cash-flushed state power groups have been scooping up overseas assets in recent years, taking advantage of the euro zone crisis.

"There's a big trend for Chinese companies to invest in infrastructure in Europe. It's certainly good for sellers since they usually overpay assets and often have no big governance pretensions," said Alberto Forchielli, managing partner at private equity Mandarin Capital.

Italy has introduced special powers to protect its major energy assets, and in any case will sell only a minority stake in the holding company that controls the grids. But concerns over governance issues remain.
"There are some investors we are exercising caution with ... we'll have to see what powers to give them," a source close to the Treasury said, speaking of suitors interested in CDP Reti.

Last week, CDP Chief Executive Giovanni Gorno Tempini said he expected a decision on an investor in CDP Reti by the end of August.

The government is looking to raise around 11 billion euros a year from privatisations, starting this year. At market prices, a 49 percent of Terna and the stakes in Snam held in CDP Reti could be worth more than 3 billion euros.

The privatisation drive announced last year is facing hurdles as many of the companies on the block are not ready to be sold to private investors. On Sunday, the economy minister said the sale of 40 percent of Italy's post office may be delayed.

CDP, which has already parked its 30 percent holding of Snam in CDP Reti, said last year it intended to transfer its 29.9 percent stake in Terna to the vehicle as well to make it more attractive. It has still not done so.

In May, Flavio Cattaneo was replaced as CEO of Terna by a former CDP general manager, Matteo Del Fante, who has said he intends to continue his predecessor's strategy.

In his nine-year stewardship at Terna, Cattaneo won plaudits for increasing returns for investors by expanding operations beyond the firm's core regulated grid business into battery storage and renewable energy development and by acquiring assets overseas.