AES has made a bid to gain control of one of Venezuela’s leading utilities, EDC. Venezuela is undergoing a period of political instability, and has confused potential investors over its privatization programme. Siàƒ¢n Green asks whether AES is making the right move.
AES Corporation’s battle to gain control of C.A. La Electricidad de Caracas (EDC) moved a step closer to success in late May as the Board of Directors of Caracas’ stock exchange (BVC) gave its approval to the deal.
The approval by the BVC will have doubtless pleased AES, one of the world’s largest power companies, and dismayed EDC, which has desperately been trying to block AES’s move.
AES is hoping to buy 100 per cent of EDC’s shares through the local stock exchange and through American depositary shares (ADSs) quoted on the New York stock exchange. Its latest offer stands at $0.57 per share and $28.50 per ADS, and expires on 6 June for the ADS and 9 June for the Venezuelan shares. As of May 26, approximately 45 200 shares and around 759 881 ADSs had been tendered.
AES launched its offer for 51 per cent of EDC on April 28, offering $0.47 per share and $23.50 per ADS. This represented a premium of 77 per cent over the closing price of the ADSs on April 26, and valued EDC at $863m. EDC quickly rebuffed the offer, calling it “unsolicited and not friendly”.
It called on its shareholders to reject the offer and launched a $300m share buy-back scheme, saying that it would double AES’s offer and pay as much as $50 per ADS.
EDC’s reluctance to accept defeat is mainly driven by the fact that it believes that AES’ offer severely undervalues the company. Venezuela is in the midst of a recession – its economy contracted by 7.2 per cent in 1999 – and stock prices are consequently in a trough. Its share buy-back offer, seen by analysts as a tactic to increase its stock price and force AES to raise its bid, has worked.
This course of action would only keep AES’s offer at bay temporarily as the share buy-back would be limited to 14.5 per cent of the company under stock market rules.
EDC is also perhaps not so keen to succumb to control by a foreign investor. EDC is a ‘flagship’ private Venezuelan company that has seen considerable success and is probably keen to maintain its status quo.
David Voght, managing director of IPD Latin America, voiced one opinion: “There’s something valid in keeping it Venezuelan, but at the same time, there is also something valid in globalization.”
Globalization is certainly one of AES’s strengths. It owns power assets in countries across the world: Argentina, Bangladesh, Panama, Mexico, India, El Salvador and the UK, to name a few. It carries a lot of experience, local knowledge, and weight. And if it succeeds, it will have bought up a strong asset at a bargain price.
EDC’s operations include interests in several distribution businesses in Venezuela, Colombia and El Salvador which serve over 2.8 million customers.
It also operates several generation facilities in Venezuela and Colombia providing 3500 MW of capacity. Its other business interests include telecoms, oil and gas, engineering and property services. It reported a 135 per cent increase in net income for 1Q 2000, and a profit of $3.8m for the period compared with a loss of $3.7m a year earlier.
“EDC is probably the best managed private company in Venezuela and [also] the most profitable electric company,” said Voght, adding, “The political issues … have depressed the price of stock on the Venezuelan stock market, so the company’s shares are worth less than the book value of the company. Now is a good time to get a bargain.”
Nevertheless, political issues pose political risks. AES made its offer amid heightened political uncertainty just prior to the Presidential elections that were scheduled for May 28. These elections were, however, postponed due to technical difficulties that would render the polls illegitimate. “Political risk is at an all-time high in Venezuela,” said Voght, “but it hasn’t been increased by the fact that the elections were cancelled.”
Politics have played a major role in Venezuela’s electricity sector in recent months. The country passed a new electricity law in 1999 that will implement liberalization in the electricity sector, but this has done little to allay uncertainty over the country’s much-delayed privatization programme.
But many are now taking a more positive view on privatization: “What we’re seeing right now is some political interest to privatize which we didn’t see for the first year of the Chavez administration,” said Voght. “This government has really propelled new legislation in the gas and power sector … AES is reflecting this as confidence in the country. In the energy sector as a whole, there is a lot of work that needs to be done, but they are moving in the direction where there is going to be some consistent policy, which in the long run is going to help people to invest.”
Another major issue in the Venezuelan power sector is investment in infrastructure, particularly in the transmission sector. Financing projects in a country such as Venezuela could be expensive. But, said Voght, AES has a lot of financial capacity and has good relationships with the multilaterals. “I don’t see that as being a problem for AES.”
And as Voght points out, EDC gives AES a strong foothold in Venezuela with several opportunities for growth. “AES has been trying very hard to get into Venezuela for many years now. They are definitely interested in the country as an expansion of their Latin America business [and are] sure that they can create a profitable business here. EDC is a really good way to do that.”