Brazil is preparing to privatize Eletrobras in a US$7 billion deal

RIO DE JANEIRO, BRAZIL – Brazil is moving forward with the process of relinquishing its majority stake in Latin America’s largest power utility, Eletrobras, through a share sale that could raise US$7 billion. It would be the country’s largest privatization in more than two decades.

Centrais Elétricas Brasileiras SA (ELET6), as the Rio de Janeiro-based company is formally known, is issuing new shares as the national development bank (BNDES) sells part of its stake in the company.

The deal is expected to be priced after the markets close on Thursday. The proceeds will likely be used to fund subsidies and other relief measures ahead of the October presidential election.

The government’s stake will be reduced to less than 50% of the voting shares after the sale. With an estimated value of R$34 billion (US$7 billion) based on the closing share price on June 8, it could be the second-largest equity deal globally in 2022.

After years of talk of privatizing Eletrobras, the deal strengthens Economy Minister Paulo Guedes’ credentials in his push to reduce the size of the state.

It also comes at a time when Bolsonaro, who sits behind Luiz Inácio Lula da Silva in the presidential race, needs to reassure investors who question his commitment to a liberal agenda while boosting his popularity among Brazilians who blame him for the country’s runaway inflation.

Consumer prices, which have risen nearly 12% annually, have become a decisive issue for Bolsonaro’s re-election campaign.

“It’s a pleasant surprise,” said Silvio Castro, a founding partner and chief investment officer of Grimper Capital in São Paulo, noting that the window for selling was closing fast as the country nears the election. “It could leave room for the privatization debate to gain momentum.”

Brazil unveiled plans to privatize Eletrobras in 2017 during Michel Temer’s presidency. However, the process only gained momentum in recent months after the government gave in to several demands from lawmakers, such as agreeing to build several thermoelectric plants that run on natural gas, which will require pipelines and transmission lines.

“Ironically, the sale picked up steam at a time of frustration with the liberal agenda,” said Elena Landau, an economist who contributed to a privatization push in the 1990s while working at BNDES. “It seems like an exception as if it was a response to investors.”

DIVERGENT POLICIES

The Eletrobras sale also underscores an important ideological contrast between the leading presidential candidates. While Bolsonaro pledged to go ahead with the privatization program if re-elected, putting Petrobras at the center, Lula da Silva has sharply criticized the process and promised to reverse it if he wins the election.

Further privatizations would stop under Lula da Silva, but his threat to cancel the sale of Eletrobras is mainly rhetorical, as it would require the government to obtain congressional authorization to spend a large sum of money to buy back the shares.

It would also raise doubts about the new government’s willingness to honor contracts, possibly scaring off investors.

The Eletrobras deal, which received approval from Brazil’s accounting court and Congress, is likely to become the second-largest equity offering on record in the country after the US$70 billion sale of Petrobras shares in 2010, according to Bloomberg data.

It will likely be the largest Brazilian privatization since Telecomunicações Brasileiras SA (TELB4) was sold in 1998.

Despite last-minute legal attempts to derail the deal, there is enough investor appetite for the deal to succeed, according to two people with knowledge of the matter.

The share price exceeds the minimum value set by the country’s accounts court, added the people who asked not to be named because it is non-public information.

The banks involved in the deal are Banco BTG Pactual SA (BPAC11), Bank of America Corp (BAC), Goldman Sachs Group Inc (GS), Banco Itau BBA SA (ITUB), XP Investimentos SA, Banco Bradesco BBI SA (BBD), Caixa Economica Federal (CABK), Citigroup Inc (C), Credit Suisse Group AG (CS), JPMorgan Chase & Co (JPM), Morgan Stanley (MS), and Banco Safra SA.

With information from Bloomberg