Brazil’s plan to make manufacturers more competitive is killing investments in utilities.
About 17.4 billion reais ($8.54 billion) in the market value of Brazil’s 15 biggest power utilities has been wiped out since President Dilma Rousseff started implementing a plan to cut power bills in September. State-run generator Centrais Eletricas Brasileiras SA (ELET6), known as Eletrobras; Cia. Energetica de Minas Gerais, or Cemig; and Cia. de Transmissao de Energia Eletrica Paulista, or Cteep, are among the biggest losers.
The compensation of 19 billion reais offered to utilities by Rousseff’s administration in exchange for reducing electricity prices fell short of analyst and company expectations and triggered a stock selloff yesterday. Banco Itau SA lowered its share-price estimates for utilities including Cteep because of “unpredictable risks.”
“It’s another sign of government intervention in publicly traded companies,” Saulo Sabba, who helps manage 500 million reais as a director at Banco Maxima SA, said by telephone from Rio de Janeiro. “Investors will demand a higher premium. They’ll buy shares cheaper because the risk has risen.”
As growth in Brazil slowed this year, Rousseff’s administration shifted its focus from stimulating consumer demand to attacking the high costs of business that have long deterred investment. Manufacturers pay electricity prices that are the fourth-highest in the world, making them less competitive, according to the National Industry Confederation.
Under terms of the government plan published Nov. 1, utilities whose concessions are set to expire between 2015 and 2017 will reduce electricity rates by about 70 percent as of Jan. 1 to an average of 30 reais a megawatt-hour, according to estimates by UBS AG. Utilities that haven’t already recouped their investments in plants and transmission lines will receive compensation totaling 19 billion reais, with 14 billion reais of that going to Eletrobras.
Eletrobras Chief Executive Officer Jose da Costa Carvalho Neto said Oct. 31 that he expected to receive “close to” 30 billion reais in compensation.
Eletrobras plunged 8.2 percent yesterday, the biggest decline on the benchmark Bovespa index, which fell 0.3 percent. Cesp’s 5.8 percent loss was the second-biggest on the index and the stock traded at the lowest level since May 2009. Eletrobras slid 0.5 percent to 15.35 reais at 10:29 a.m. in Sao Paulo today while Cesp was unchanged at 17.19 reais.
Eletrobras’s “technical teams are analyzing the terms” announced by the government, Chief Financial Officer Armando Casado de Araujo said in a statement on the company website yesterday. Cesp will comment “after a deeper analysis,” the company’s press office said in an e-mailed response to questions. Cteep’s press officers didn’t respond to e-mails and phone calls seeking comment.
The proposed compensation is equivalent to only half of the book value of assets, UBS analysts Lilyanna Yang and Henrique Peretti said in a Nov. 2 report to clients. The proposed 30 reais per megawatt-hour for generation assets becomes 9.50 reais once taxes and other charges are deducted, “barely enough” to cover costs for most companies, they said.
The stock selloff may create a buying opportunity because the biggest effect of government intervention has already been priced into the shares, said Fernando Goes, an analyst at Clear Corretora brokerage.
‘Time to Buy’
“I don’t think a lot changed from previous announcements,” Goes said in a telephone interview from Sao Paulo. “This may be a time to buy if you are looking at the long term. In fact, I’d recommend buying.”
The government’s proposal led Banco Itau on Nov. 5 to cut the 2013 year-end target prices for Cteep and Cesp’s shares on smaller earnings estimates. Cteep trades at 5.25 times reported earnings, Cesp fetches 20.9 and Eletrobras has a ratio of 4.4. That compares with 19.3 for the Bovespa index.
Companies have the option of rejecting the government proposal and continuing operating their assets under existing rules until the concessions expire. They would then be allowed to participate in auctions to operate those assets, competing with other bidders.
Cemig said in October that it wouldn’t seek to renew concessions under the new rules for three hydroelectric plants, including the 1,700-megawatt Sao Simao dam. Cemig’s press office said in an e-mailed response yesterday that the company is evaluating terms of the government’s proposal.
Concern about whether companies will accept the new conditions or go to court make stocks unappealing even after the sector posted a steep year-to-date decline, said Pedro Galdi, head strategist of SLW Corretora de Valores e Cambios Ltda.
“This is very harsh on the sector,” Galdi said in an interview yesterday from Sao Paulo. While shares have dropped a lot, “there are a lot of uncertainties in the air,” he said. “We still have to wait and see what happens.”
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