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Brazil's Eletrobras may become force for energy transition after privatization

reuters.com · 06/09/2022 06:00
Brazil's Eletrobras may become force for energy transition after privatization

By Leticia Fucushima

- Eletrobras EBR, Latin America's largest power generation and transmission company, may become a major force in energy transition after a share offering expected to privatize it on Thursday.

The Brazilian company, formally known as Centrais Eletricas Brasileiras, is likely to expand wind and solar generation, adding to its strong base of hydroelectric dams, said consultant Luiz Augusto Barroso. It foreshadows such investments in the prospectus for the offering.

Eletrobras is also expected to cut costs after privatization.

Although the sale will be worth less than recent asset disposals by Petrobras and operating licenses for large airports, Brazil has not privatized a large utility since the sale of former telecom monopoly Telebras in 1998.

The sale of Eletrobras shares may raise around 35 billion reais ($7.1 billion), whereas the different companies that Telebras was broken into were sold for $20 billion, said Rafael Souza, researcher at Fundacao Getulio Vargas.

Analysts see benefits in cost reductions and easier access to capital to invest in new technology and renewable sources.

The offering will be priced on Thursday, with bidders including Canada's CPPIB and Singaporean state investor GIC. Demand on Thursday had already reached 50 billion reais, two sources said. nL1N2XV1GZ

Initially, the government will dilute its stake from 72% to 45%. By ceasing to be a majority shareholder, it may give the company more access to foreign projects.

Eletrobras could contribute to energy transmission and regional energy integration by participating in cross-border transmission projects.

In the prospectus, Eletrobras mentions renewables, transmission, artificial intelligence, blockchain technology and energy storage as possible destinations for capital.

The governance framework designed for the privatization has evolved from that of companies sold in the 1990s, said Fabio Coelho, head of the Capital Markets Investors Association. At that time, buyers were a few pension funds and institutional investors.

Rules mandating dispersed ownership follow similar measures adopted in Europe when large state-owned power companies were privatized, said Coelho, citing Italy's Enel SpA ENLAY and EDP EDPFY as examples.

An investor or group of investors that reaches a stake above 50% of voting capital must offer to buy all other shares at double the highest price reached in the previous two years.

TURNAROUND EXPECTED

Reducing Eletrobras's corporate structure is expected to bring savings. The holding company has five large subsidiaries, 32 directors, 44 board members and 10,000 employees.

"Once the company becomes a corporation with dispersed capital, it will cut costs, better manage its balance sheet and grow. A lower cost of capital will be one of the main drivers of higher value", UBS analysts Giuliano Ajeje and Guilherme Reif said.

Analysts also expect gradual resolution of large liabilities involving litigation, currently around $17.6 billion. Private companies have more incentive to settle than state-controlled ones, because state employees are subject to lawsuits related to the use of public funds, said lawyers Ana Karina Souza and Joao Reis with the law firm Machado Meyer.

($1 = 4.8988 reais)


(Reporting by Leticia Fucushima; Editing by Christian Plumb and Bradley Perrett)

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