Yanqui Raider, Go Home
It was a corporate chess match the likes of which Venezuela had never seen. Virginia-based AES Corp., the largest U.S. power-plant developer, had set its sights on Grupo La Electricidad de Caracas. The management of the 105-year-old utility mounted a wide-ranging defense, determined to block Venezuela's largest-ever hostile takeover bid. It appealed to nationalism, sought help from securities regulators, and engineered a share buyback. But AES would not be defeated: With a week to go before its offer expired on June 12, it already had 52% of EDC's shares.
Such Wall Street-style takeovers are virtually unknown in Latin America's clubby business world, where old families keep a tight rein on company control. But $3.3 billion AES is determined to add EDC to its growing Latin portfolio. It's taking advantage of the utility's sagging stock price, which has been hit by recession and uncertainty over economic policy under paratrooper-turned-President Hugo Chavez. The $952 million AES bid also puts other local companies on notice that their undervalued prices make them potential targets, too. Companies, such as food and household-products company Mavesa, are considering share buybacks to protect themselves from hostile takeovers.
The AES bid also suggests that foreign investor confidence in Venezuela is rebounding, at least among those companies willing to look past the short-term instability caused by Chavez' populist politics. Surprisingly, Chavez, an outspoken nationalist, has kept quiet as the takeover battle has unfolded. He may be secretly delighted: The AES offer is a swipe at the Venezuelan business oligarchy he despises.
AES's unsolicited bid, launched on Apr. 28 and since revised several times, caught EDC unprepared. Like that of most of the companies traded on the small, sleepy local exchange, EDC's stock has long been undervalued. "Every investment banker that has visited them has told them they are sitting ducks," says Robert Bottome, director of consultancy VenEconomy. But EDC failed to act.
AES, which had studied EDC for two years, sought a minimum 45% stake by offering 57 cents a share for locally traded shares and $28.50 for American Depositary Receipts. That's a 119% premium over the share price at the time of the initial bid, but below EDC's estimated book value of $1.03 per share.
EDC responded with a public relations attack on AES. "Their offer is very low. They're taking advantage of the political uncertainty in the country," said EDC President Francisco Aguerrevere before he was hospitalized last month with heart problems. His company has filed many petitions asking the Venezuelan National Security Assn. to block the takeover. Indeed, authorities at one point suspended the tender when it was learned AES had cut a deal with Spanish power company Union Fenosa to keep it out of the bidding.
In a desperate bid to fend off AES, EDC also pushed through a $300 million buyback plan that would retire 14.5% of the company's stock. Shareholders, led by company workers and pensioners, approved the scheme at an emotional May 29 meeting. "I'm not going to sell Venezuela," said 30-year employee Elizabeth Freyte to thunderous applause.
PUZZLE PIECE. Such patriotism is not surprising. EDC is one of Venezuela's biggest, most venerable companies, with net income of $150.3 million on sales of $840 million last year. The utility serves 1.1 million customers in Caracas and its stock accounts for roughly 40% of trading volume on the local exchange.
For AES, EDC is an ideal asset to fill out its South American portfolio. "It is a missing piece to the Latin American puzzle," says AES Argentina President Eduardo Dutrey, who is part of the Caracas takeover team. The company has moved aggressively into Latin America over the past decade, spending $5.4 billion in the region, which now generates close to 30% of its revenues.
AES' Chief Executive, Dennis Bakke, a devout Christian who defines his company's mission as stewarding God's natural resources for the good of mankind, has said he was particularly inspired by EDC's huge cross on the Avila mountain overlooking Caracas that is lit up at Christmas. But it was probably more earthly concerns that led his company to launch an all-out fight for EDC.