M&A Drives Cemig as Top Pick for Banco do Brasil Energy Fund Returning 20%

Cia. Energetica de Minas Gerais’s drive to expand through mergers and acquisitions and boost dividends is making the power company the top stock pick for 2012 at Banco do Brasil SA (BBAS3)’s 20-percent-return energy fund.

“The company has been very well managed for several years,” Jorge Ricca, head of stock funds at the bank, said in an interview in Rio de Janeiro. Belo Horizonte, Brazil-based Cemig, the country’s third-largest utility, has a track record of good acquisitions and shows “appetite” for growth at a time when industry consolidation is expected to accelerate, he said.

Banco do Brasil’s energy equity fund, which includes as many as 20 companies and manages 115 million reais ($66.7 million), returned 20 percent in 2011, compared with an 18 percent decline in Brazil’s benchmark Bovespa stock index. It was the bank’s best performing multi-company fund last year.

Brazilian power companies are benefiting from rising demand after an expanding economy pulled 20 million people out of poverty under president Dilma Rousseff and predecessor Luiz Inacio da Silva. Power consumption rose 3.6 percent in December from a year earlier, the 25th consecutive month of increases.

Cemig, which generates, transmits and distributes power, boosted dividend payments 33 percent over the past three years, according to Bloomberg data. The company had 3.9 billion reais in cash at the end of the third quarter and has a 50 percent dividend payout ratio, according to an investor presentation on the company’s website. Third quarter earnings before interest, taxes, depreciation and amortization rose 21 percent.

Made Acquisitions

Cemig during the past three years made at least 11 acquisitions including power distributor Light SA and a stake in the Belo Monte dam project as part of plans to become Brazil’s second-largest energy company by 2020. Last week Cemig agreed to buy 40 percent of Gas Brasiliano from Petroleo Brasileiro SA.

The planned sale of shares of Cemig’s Transmissora Alianca de Energia Eletrica SA unit will also benefit the company by boosting its cash position, Ricca said. Cemig acquired a controlling stake the company, known as TAESA, in 2010 and said last year that it may sell shares in it to meet Brazilian free float rules. The sale would aim to take TAESA’s total free float from 25 percent to 4 percent.

Cemig, Brazil’s third largest electricity company by market value, is the South American country’s largest integrated power utility with generation capacity of 6.925 megawatts, or 7 percent market share. The company has 10 percent of the transmission market and 12 percent in distribution.

Centrais Eletricas Brasileiras SA is Brazil’s largest power company, followed by CPFL Energia SA.

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

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