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Sao Paulo to Sell Cesp Stake by March 31; Shares Fall

Sao Paulo will auction its interest in Cia. Energetica de Sao Paulo, Brazil's third-largest generation utility, in the first quarter as it seeks investment to ease an electricity shortage. The company's shares fell on concern about concession renewals.

Sao Paulo state will auction off its controlling stake in Cesp, as the utility is known, between Feb. 20 and March 31, George Tormin, the state's adjunct-secretary of finance, said today at a public hearing at Sao Paulo's Bovespa stock exchange.

The sale of the company, which generates electricity from hydropower dams in Sao Paulo state, Brazil's most populous and industrialized region, is expected to earn the state government as much as 7.5 billion reais ($4.3 billion), UBS Pactual, the Brazilian unit of UBS AG, said in a Jan. 3 report.

``The sale to private investors definitely offers the chance of more rapidly expanding generating investment in Brazil,'' said Guilherme Toledo, Cesp's chief executive officer. ``The history of previous sales shows this.''

The company's class B preferred shares, its most-traded class of stock, fell 1.92 reais, or 4.1 percent, to 44.55 reais, the lowest close since Dec. 28. Earlier, the shares gained as much as 11 percent to 41.20 reais.

In the two months before today's public hearing, the stock had increased 37 percent. Cesp has risen 91 percent in the last year, the second-best performer on the Bovespa index of the 64 most-traded stocks on the Sao Paulo Stock Exchange. Its performance was more than double the exchange's increase.

Concession Renewal

Cesp's rights to operate four power dams expire over the next eight years and the federal government may choose not to renew the concessions, Armando Shalders, Cesp's head of administration, said in an interview. Rights to operate Porto Primavera dam, which expire in May, probably will be renewed, he said, after a hearing on a plan to auction a controlling stake in the company.

``It seems like the market expected that the concessions would be renewed,'' said Daniella Marques, who manages 2 billion reais in assets at Mercatto Gestao de Recursos in Rio de Janeiro and doesn't own CESP shares.

Under concessions, ownership of the dams returns to the federal government when they expire. The government has no obligation to pay any compensation unless investment by concession owners has yet to be amortized, Shalders said after the hearing.

Cesp operates six hydroelectric dams in Sao Paulo state. The dams, on the Parana, Tiete and Paraiba do Sul river systems, have a capacity to generate 7,455 megawatts of electricity.

Takeover Cost

The buyer will also have to purchase minority shareholdings belonging to those who own Class B preferred shares, adding to the cost of the takeover. No publicly traded, state-controlled Brazilian utilities can make offers, Tormin said, limiting potential bidders. Auction rules will be ready for publication by Feb. 8.

Brazilian spot electricity prices have more than doubled in the last two weeks after lower-than-normal rains caused hydropower reserves to fall to their lowest since the government was forced to ration electricity in 2001. New investment in generation capacity is lagging behind the country's growth, according to executives of such energy-hungry companies as Cia Siderurgica Nacional SA.

Economic Growth

Without new investment, the government of Brazilian President Luiz Inacio Lula da Silva is concerned the country will be unable to maintain growth rates above 5 percent a year, the highest in more than a decade. The sale of Cesp will be the first major sale of state power assets since 2001, when rationing derailed the sale of Cia. Paranaense de Energia-Copel, the state distributor and generator in Parana state.

The utility sells power to the main distribution companies in Sao Paulo, including Eletropaulo Metropolitana SA, Empresa Bandeirante de Energia SA, Cia. Paulista de Forca e Luz and Elektro Eletricidade e Servicos SA.

Cesp had profit of 50.9 million reais, or 16 centavos per share, in the third quarter of 2007, compared with a loss of 23.1 million reais, or 7 centavos, a year earlier. Sales were 567 million reais.

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at jblount@bloomberg.net.

To contact the editor responsible for this story: Tony Cox in Houston at acox3@bloomberg.net.

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