Chinese state fund lures Hermes into £11bn National Grid bid

The City asset manager owned by BT's pension fund has joined a Chinese government-led bid for the UK's biggest gas pipeline network amid ministerial warnings that foreign takeovers of British assets will attract closer scrutiny.

Sky News has learnt that Hermes Investment Management signed up on Thursday to a consortium vying to buy a controlling stake in National Grid (LSE: NG.L - news) 's gas distribution division.

The deal could value the business at more than £11bn including debt.

The bid joined by Hermes comprises China Investment Corporation (CIC), the country's sovereign wealth fund; the German asset manager Allianz; fund managers Dalmore Capital and Amber Infrastructure; and the Australian bank Macquarie.

Hermes' recruitment is significant because the consortium is said to believe that the involvement of a blue-chip British institutional name will strengthen its chances of acquiring a business which supplies gas to 11m UK homes.

Hermes invests on behalf of local authority pension schemes and other UK-based clients, as well as current and former employees of BT Group (Other OTC: BTGOF - news) .

Earlier in the auction, Hermes had been part of another consortium featuring state-backed funds from Abu Dhabi and Kuwait, and Canadian pension funds.

That bid was eliminated from the process on the basis that it was significantly lower than those of competitors, according to insiders.

It was unclear on Thursday whether Hermes, which owns stakes in Eurostar and Associated British Ports, would be fronting the new consortium's final offer, or what the size of its financial commitment would be.

Infrastructure investors said, though, that Hermes' return to the auction was notable, and reflected bidders' anxiety about the "change in tone" from ministers about foreign investment into vital UK infrastructure.

A deal to give the go-ahead to the Hinkley Point nuclear power station in Somerset was sanctioned by Downing Street only after safeguards were included relating to future changes of ownership.

Other deals relating to critical national infrastructure would also be subject to closer scrutiny, the Business, Energy and Industrial Strategy Secretary Greg Clark said last month.

Promises of a more rigorous approach to examining infrastructure ownership follow decades dominated by an open-door policy to overseas capital.

Assets including the UK's busiest airports and many of its largest utilities have been swallowed by foreign companies since the 1990s.

The sale of the National Grid gas distribution arm has turned into a contest between an array of global investors, with at least two other Chinese bidders in the frame.

The other consortia in the process include participation from Fosun, a Chinese conglomerate; and China Resources Gas, which has teamed up with partners from Australia and Singapore.

Li Ka-shing, the Hong Kong-based tycoon who is the UK's biggest inward investor, is also fronting another offer for the business, although there were suggestions this week that his bid had also been eliminated from the auction.

Most of the UK's other major gas distribution pipelines are already owned by international investors.

Hermes and National Grid both declined to comment, although the latter has previously said: "The new owner will have to be approved by regulators and operate under the relevant requirements.

"Networks are subject to strict rules and criteria in terms of security reliability and availability and any buyer will need to prove to Ofgem and government that they can meet these criteria."