Promise of gains from Eletrobras privatization attracts large funds

After what could be called a more political phase, the privatization of Eletrobras definitely reaches the capital market. The operation was approved this Wednesday (18) at the TCU (Union Court of Auditors) by 7 votes to 1.

The result of the trial is a victory for Minister Paulo Guedes (Economy), who now has the way to carry out the privatization of an entire company before the end of the mandate of Jair Bolsonaro (PL). The challenge now is to carry out the operation even with adverse market conditions.

The rapporteur Aroldo Cedraz and ministers Benjamin Zymler, Bruno Dantas, Augusto Nardes, Jorge Oliveira, Antonio Anastasia and Walton Alencar Rodrigues voted in favor of the process. Minister Vital do Rêgo Filho voted against.

The government races against the clock to carry out the operation as soon as possible. The sale of Eletrobras was modeled to occur through capitalization on the Stock Exchange. Shares and share receipts (ADRs) will be issued, respectively, in Brazil and the United States.

In the process of convincing the privatization, representatives of the Ministries of Economy and Mines and Energy always highlighted that Eletrobras could attract pension funds and sovereign wealth funds, which would give impetus to a new phase of investments in the Brazilian electricity sector.

The final job of the government and the bank syndicate responsible for the operation is to ensure the participation of these actors.

In the world of equity offerings, they are known as anchor investors. The larger and more highly regarded the anchor, the better the performance of an operation, as well as the scenario for the company.

More robust and prepared, they are seen as important influencers in choosing the president, board and directors, qualifying the management of the business.

Managers indicate their intention to participate in the offer

According to people interviewed by Sheet, among the big investors who would be interested in acting in the offer, putting in checks for a few billion reais, would be the 3G fund, asset manager of Brazilians Jorge Paulo Lemann, Carlos Alberto Sicupira and Marcel Telles. She is already one of the main holders of preferred shares in Eletrobras,

There are also positive signs from Itaúsa, whose businesses include Itaú Unibanco and industries such as Alpargatas. In statements made in February this year, the president of Itaúsa, Alfredo Setubal, even commented that businesses in the health and renewable energy areas were being evaluated by the conglomerate.

The GIC (Singapore Sovereign Fund) and the CPPIB (Canada Pension Fund) have also expressed interest in participating in the operation.

CEO of the management company Logos Capital, Ricardo Vieira says that he has held Eletrobras shares in the funds’ portfolios for some time, and that he intends to increase his position in the share offering to be carried out within the scope of the company’s capitalization. “Depending on the price,” he adds.

At B3, the share is around R$40, pulled in recent months by the prospect of privatization. Compared to May 2020, the shares are up almost 70%. The increase usually occurs in the case of a follow-on, as the launch of shares is called when the company is already listed on the Stock Exchange.

Many buy the paper before, to position themselves and have the preference to enter the offer. The movement pulls the paper.

There would, however, be a discussion about the share price. The perception of bank executives interviewed by the report, with the commitment of not having their name revealed, is that some large investors aim for a price lower than the current quotation.​

In this case, the analysis considers both sides of the coin. There are obvious advantages, analysts point out, in investing in Eletrobras. It is the largest energy company in Latin America, an area of ​​basic infrastructure with great growth potential.

However, large investors prefer classic privatizations, in which the state withdraws entirely. As the Union remains, some still resist entering the operation with more force. In this case, the banks’ ability to convince will weigh against the efficiency gains that the company can offer without state control.

“With the company being privatized, it should have another type of evaluation by the market, with a much greater potential efficiency gain”, says Vieira.

According to Marcos Peixoto, manager of XP Asset, Eletrobras is one of the largest positions within the manager’s fund portfolios. The investment in the company was made in mid-2020, when the outbreak of the pandemic caused the prices of several assets to plummet.

Today, the XP group manager is among the company’s ten largest shareholders among Brazilian investors.

Due to the relevant position occupied, Peixoto says that the manager was approached in mid-March to act as an anchor investor in the operation.

The minimum limit stipulated for investors to act as anchors and guarantee a firm demand of R$ 1.5 billion, however, was considered very high considering the volume of resources under management.

Anyway, Peixoto says he intends to participate in the offer, seeing a high potential for appreciation for the shares.

Even if it ends up not being privatized, even so, the company’s shares on the stock exchange seem excessively discounted, in the assessment of the manager of XP Asset.

He understands that, given the recent results presented by Eletrobras in the first quarter, the shares should be quoted closer to the R$50 range, even without the conclusion of the privatization process.

With privatization, and with the potential efficiency gains, the shares could reach levels around R$ 70 in the medium term, Peixoto projects.

“There’s little of the privatization priced into the papers”, says the manager. He predicts that, with the approval of the TCU, the offer should be on the street by mid-June.

The president of Eletrobras, Rodrigo Limp, defended this Tuesday (17) that the privatization of the company be carried out “as soon as possible”, to avoid the risk of loss of value with the holidays in the Northern Hemisphere and the proximity to the presidential elections. in Brazil.

“There is the vacation period in the Northern Hemisphere that ends up alienating investors and the proximity to the electoral period. That is why we think it is positive for the Union that the operation takes place in the shortest possible time”, said Limp.

NEXT STEPS

After approval by the TCU, banks begin the issuance process

• Officialize deliberations within the BNDES and the government
• File the transaction with the CVM and the SEC
• Launch the offer, based on the results of the first quarter of 2022; prospectuses are already being updated3
• Promote the roadshow, as they are called visits to investors to present the company, which will be shorter because there was a previous work and there is a rush to reach the issue
• Pricing paper (“pricing”)
• Carrying out the operation on the Brazilian and New York stock exchanges takes place in the first week of June

WHO IS IN THE OPERATION

In addition to the BNDES, there is a syndicate made up of private banks operating in the market

Leaders, who introduce the company:

• bank of america
• BTG Pactual
• Goldman Sachs
• Itaú BBA
• XP Investimentos

Bookrunners, who make reservations:

• Bradesco BBI
• Federal Savings Bank
• citiban
• Credit Suisse
• JP Morgan
• Morgan Stanley
• harvest

CAPITAL MARKET RITE WILL BE SPEEDED

With the green light from TCU, the next few days will be dedicated to fulfilling the rite in the capital market. BNDES and União are working with the expectation of putting the operation on the street between the end of May and the beginning of June. The government works with the date of May 25th.

This is considered a short term, but feasible. “Processes such as the IPO, which the launch of the action, and follow-on, which the case of the Eletrobras operation, usually take from six months to a year”, says lawyer Guilherme Champs, founding partner of Champs Law, a law firm focused on the market. of capital.

“But in this case, the political will is strong, which makes a difference.”

According to people close to the operation, the road show, as the presentation to investors is called, will be shorter. In part, because it is necessary to release the papers in the first semester, before the electoral campaign heats up, but also because an informal work to present Eletrobras has already taken place.

Executive and company members consulted by the Sheet sought to demonstrate an optimistic view in recent weeks. However, market conditions in 2022 are recognized by government and company members as the main risk of the process. The approximation of the electoral calendar tends to increase tension between investors and may, as a consequence, make the operation unfeasible.

The more time passes, the greater the risk of turmoil and the window of opportunity closing. Some members of the government even question whether this window has already closed – although the last word is one of optimism.

The history of retraction of offers on the Stock Exchange in election years challenges Eletrobras’ operation.

Survey of Sheet based on data from B3 in the last 18 years shows that the average number of operations drops 34% in years of dispute for Palácio do Planalto. Considering only second semesters, the average amount drops by almost half (46%) in presidential race years.

The offer seeks to dilute the Union’s share, which needs to fall from 72% to 45%, raise funds to pay the grant to the State and transform the company into a corporation. No shareholder may hold more than 10% of the total shares.

Priority offers are planned for shareholders, employees and retirees. There will be space for institutional operators and small investors. As in other privatizations, it will be possible to use half of the resources deposited in the FGTS (Fundo de Garantia do Tempo de Serviço), via funds, to participate in the offer.

Eletrobras privatization began in the 1990s and suffered several mishaps

FHC (1995-2002): During the FHC government, the attempt to sell Eletrobras to the private sector began. The measure was resisted and did not materialize, but during his term, the president privatized almost all distributors, including Escelsa, a distributor in Espírito Santo, Light, in Rio de Janeiro, and Gerasul, which operated in the south. from the country

Lula (2003-2010): In addition to putting the plan to privatize the state-owned company on the shelf, the PT government curbed sales by distributors, but continued with transmission and power generation auctions. Among the initiatives that marked that moment are the start of wind energy auctions, in 2009, and that of the Belo Monte Power Plant, in 2010

Dilma (2011-2016): In six years in power, Dilma followed the guidelines adopted by Lula. Auctions were held for transmission lines and hydroelectric plants — such as Três Irmãos, in São Paulo

Temer (2016-2018): Two months after assuming the Presidency, Temer resumes privatizations and cleans up one of Eletrobras’ biggest liabilities, selling loss-making state distributors that were under the Eletrobras umbrella. There were six in all

Bolsonaro (2019-2022): In addition to bringing Eletrobras’ privatization plans to the fore again, Bolsonaro followed in Temer’s footsteps in the auctions of distributors, such as those of CEB (Companhia Energética de Brasília) and CEA (Companhia de Eletricidade do Amapá). )