Bloomberg

Romina Nicaretta

December 04, 2000

Sao Paulo, Dec. 4 (Bloomberg) — Duke Energy Corp. and AES Corp., two U.S.-based energy companies, are seen as the strongest contenders to acquire control of Cia. Energetica de Sao Paulo, Brazil’s No. 3 power generator, from the state on Wednesday.

The two companies, along with Southern Co., Portugal’s Electricidade de Portugal SA, France’s Electricite de France SA and Spain’s Endesa, have qualified to bid for Cesp at an auction where the final price could exceed well over $1 billion. The companies plan to benefit from strong electricity demand in the country’s industrial heartland.

Cesp has power generation capacity of 7,730 megawatts, accounting for more than a half of Sao Paulo state’s total electricity production. The sale is suspended by a lower court injunction. Sao Paulo state, which controls Cesp, appealed to overturn the injunction earlier today in the Sao Paulo federal regional tribunal in Sao Paulo, which is expected to rule as early as tonight.

“Cesp is important because it is big,” said Andre Segadilha, a power utility analyst at Sao Paulo-based Banco Brascan SA. “The company that buys Cesp will be an important player in Sao Paulo. The sale will determine who will be the top cat.”

Sao Paulo state plans to sell 38.7 percent of Cesp at an auction on the Sao Paulo Stock Exchange for a minimum price of 1.74 billion reais ($878 million).

Analysts expect competition among the bidders to drive the sale price to up to 2.6 billion reais, or 50 percent above the minimum price. That helped boost the price of Cesp’s preferred stock, which has risen 78 percent to 19.7 reais this year.

The sale of Cesp comes amid concern the sale of government- owned Centrais Eletricas Brasileiras SA’s units, the country’s largest power generator, may not happen next year due to lack of political interest, analysts said.

“Cesp is the last opportunity to enter the (Brazilian) power generation market in the short-run,” said Mario Palhares, a power utility analyst at Rio de Janeiro-based BES Securities. “Nobody knows when and how Eletrobras will be sold.”

Cost Saving
Analysts are betting Duke and AES are the strongest bidders because those two companies have already bought power generation companies in the state, allowing them to save on costs if they buy Cesp.

The part of Cesp that will be sold is concentrated on the basin of the Parana River, which is on the border of Sao Paulo and Parana states. Cesp provides more than a third of the energy consumed in Sao Paulo state.

The state government sold two power generators spun off from Cesp last year, raising $1.68 billion. AES bought a 38.6 percent stake in Cia. Geracao de Energia Eletrica Tiete in October last year for 938 million reais, while Duke Energy paid 1.24 billion reais for a 39 percent stake in Cia. de Geracao de Energia Eletrica Paranapanema in July.

Big Size and Risks
But Cesp has also big problems. Endesa, EDP and Southern Co. said they may not bid for Cesp if the sale is not delayed. They want the state to solve “some unresolved contingencies,” according to Endesa. Those include the lack of an environmental permit to operate Cesp’s Porto Primavera hydroelectric plant, something that could prevent the company’s new owner from increasing electricity production in the future.

The country’s environmental and natural resources agency IBAMA said it granted a license this morning for Cesp to run its Porto Primavera plant.

Another source of concern is Cesp’s debt of 7.6 billion reais, with as much as 1.8 billion in short-term debt. Cesp’s debt accounts for more than 70 percent of the utility’s total net worth, while that ratio in state-owned companies such as Cia. Paranaense de Energia, Brazil’s No. 2 integrated utility, is 30 percent, analysts said.

Sao Paulo state said it does not plan to delay the sale despite complaints from bidders.

As a result, analysts speculate some of the six contenders may form partnerships in order to jointly bid at the auction to lower acquisition costs and spread the risk. One bet is a partnership between AES and Southern, which have bid together in the past for a minority stake in Cia. Energetica de Minas Gerais, Brazil’s No. 1 integrated utility. Both companies declined to comment on the speculation.

Boosting Stake
Cesp’s new controlling is expected to boost its stake in the utility by setting a public tender offer to buy shares in the hands of minority shareholders, following a stream of foreign companies in Brazil that have boosted their stakes in power utilities in the country.

Companies have an incentive to buyout minority shareholders because they will be able to lower average acquisition costs. Brazilian law gives the potential buyer the right to pay individual shareholders a much lower price than the buyer will pay the government in the auction on the Sao Paulo Stock Exchange.

As a result, analysts said it is time to sell Cesp’s shares or hold them until the tender offer is set.

“The stock could fall after the euphoria before the auction is over,” Segadilha said. “Now is not the time to buy Cesp. Cemig is a much better option.”

The winning bidder may plan to delist Cesp’s shares from the stock exchange as it can raise money more cheaply abroad. But it will have to negotiate first with Banco Santander Central Hispano SA, Latin America’s largest bank, which holds 20.4 percent of Cesp through its recently acquired Banco do Estado de Sao Paulo SA.

Cesp’s shares slid 1.7 percent to 19.65 reais in late afternoon trading on the Sao Paulo Stock Exchange.

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