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Cesp Takeover Seen on Decision to Cut Revenue: Corporate Brazil

Cia. Energetica de Sao Paulo’s decision to give up half its power plants is fueling speculation the state-run utility may be sold after three failed attempts.

Cesp, as Brazil’s second-biggest power generator is known, has gained 11 percent this month, the most among Brazilian utilities, after saying it won’t renew contracts accounting for 70 percent of its revenue under new rules outlined by the government last month. The refusal means Cesp can cut debt and boost investor returns, said Cristiane Fensterseifer, an analyst at Porto Alegre, Brazil’s Geracao Corretora de Valores, which manages 6 billion reais ($2.9 billion) of stocks.

Sao Paulo state, which controls Cesp with 94 percent of the voting shares, may sell the company now that the assets included in a deal have been defined, Chief Executive Officer Mauro Arce said in an interview. More than $13 billion in the market value of Brazilian utilities has been wiped out since Sept. 11, when President Dilma Rousseff announced a plan to force companies to cut electricity prices as a condition for renewing concessions.

“Accepting the concession renewals would have created less value than just letting them expire,” Sergio Tamashiro, an analyst at Banco Safra SA, said in a telephone interview from Sao Paulo. Cesp will retain attractive assets and also receive government compensation for returning assets, helping reduce debt, he said. “It won’t be a company with problems.”

Debt Ratio

Cesp’s debt equals 1.15 times earnings before interest, taxes, depreciation and amortization, or Ebitda, making it the third-least indebted utility in Brazil with a market value of more than $1 billion. Centrais Eletricas Brasileiras SA (ELET6), or Eletrobras, has a debt-to-Ebitda ratio of 7.5, and AES Tiete SA (GETI3), a unit of AES Corp. (AES), is the least indebted with a 0.56 ratio.

Cesp’s priority must be to “pay off debt, not to invest,” Arce said Dec. 7 in an interview in Sao Paulo, when he said the company may be sold. He didn’t provide further details on a possible takeover.

At least four utilities refused to take part in Rousseff’s plan to cut electricity prices, opting instead to allow the government to hold new auctions for licenses expiring through 2017. Under the plan, utilities seeking to renew concessions expiring between 2015 and 2017 are required to cut some electricity rates by as much as 70 percent by Jan. 1. The government offered 20.04 billion reais in compensation to companies that haven’t recouped investments in plants and transmission lines.

Cesp Compensation

Cesp was offered 1.7 billion reais in compensation, less than a quarter of the 7.9 billion reais it sought, Arce said.

Other companies that rejected the government’s offer for generation contracts include Cia. Energetica de Minas Gerais, or Cemig; Centrais Eletricas de Santa Catarina SA, or Celsc; and Cia. Paranaense de Energia, or Copel. On transmission concessions, Cemig, Copel and Cia. de Transmissao de Energia Eletrica Paulista, known as Cteep, accepted the terms.

The government of Sao Paulo state isn’t discussing the sale of Cesp, a press official for the state energy secretariat, who can’t be named, said by telephone. State Energy Secretary Jose Anibal is also the chairman of Cesp.

The government of Sao Paulo state tried to sell its stake in 2008, after failing to do so in 2000 and 2001. The plan was scrapped after it failed to attract bidders because the federal government didn’t ensure it would renew Cesp’s licenses.

Below Market

Sao Paulo will likely need to sell the stake for below its current market price because the loss of the generating contracts makes the company less valuable, said Gabriel Laera, an analyst at Espirito Santo SA in Sao Paulo.

“The big question is: What’s the price?” Laera said by e- mail. A price of 9 reais per share would be fair if Cesp doesn’t bid to regain the concessions after rejecting their renewal under the government’s plan, he said.

Cesp rose 1.5 percent to 19.73 reais at 10:51 a.m. in Sao Paulo today, reducing a year-to-date decline to 40 percent. Eletrobras is down 65 percent this year, while Cemig has dropped 4.9 percent.

Cesp will return three of its six concessions, accounting for 77 percent of the company’s 7,455 megawatts of installed capacity, according to the company’s website. The government will regain control of the dams and may sell them at an auction or keep them.

The decision means Cesp may eliminate all its debt by 2015, Antonio Junqueira, an analyst at BTG Pactual, said in a telephone interview from Rio de Janeiro.

“They’ll have two years of strong cash flow generation from all plants and they’ll probably be a debtless company by 2015,” Junqueira said. “It’s a very comfortable position.”

To contact the reporters on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net; Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net

To contact the editors responsible for this story: James Attwood at jattwood3@bloomberg.net; Jessica Brice at jbrice1@bloomberg.net

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