The analysis process on the privatization of Eletrobras (ELET3;ELET6), the largest electric energy company in Latin America, responsible for 30% of the generation of this type of energy in Brazil, will go through another important stage this week.
The topic returns to the agenda of the Federal Court of Auditors (TCU) next Wednesday (20), with the expectation of a request for a view from TCU Minister Vital do Rego. The request is taken for granted and may delay the privatization process.
In a debate held on the 7th by the Court, government representatives and financial market agents highlighted that there is a unique moment to make privatization feasible until May 13th – there are doubts about how the process would look if it stays for the second semester, stacked with the electoral calendar.
But, if there are uncertainties about how the process of privatization of Eletrobras will take place, there is a lot of positive expectation around the opportunities that can be generated for the company and for the sector if the privatization is carried out.
A recent report by the Goldman Sachs bank highlights that the lower weight of the Union in Eletrobras will lead to an acceleration of the process of gaining operational efficiency that started in 2016. This amidst a cut in general and administrative expenses, optimization of the corporate structure and improvement of management of provisions and capital structure.
UBS BB evaluated, in a report released in January, that a privatization of the company could lead to a cost reduction of up to 80%, taking into account the restructuring process and internal evaluation that the company has already been preparing and which has already identified several inefficiencies .
If privatized, the state-owned company could achieve an Ebitda margin (that is, Ebitda over net revenue) of 56% and a compound annual growth rate below 20% of its operating expenses between 2022 and 2026, according to UBS BB. That would put her in line with private peers.
Analysts highlighted recent examples of successful privatization in cost-cutting. This is the case of Cesp, which recently changed its name to Auren (AURE3), after combining assets with VTRM. In about two years, until January, there was a 50% reduction in operating expenses.
space to grow
In addition, if privatized, in a third stage, Eletrobras should be able to focus “on opportunities for growth and optimization of the capital structure from its current leverage”, points out the Goldman report.
Leverage is once the ratio between net debt and Ebitda [lucro antes de juros, impostos, depreciações e amortizações, na sigla em inglês]well below the industry average, both with investments and dividends, according to analysts.
“Overall, we believe that Eletrobras can become a major consolidator of the electricity sector in Brazil. With an unleveraged balance sheet and the need to optimize its capital structure, we believe the company may see mergers and acquisitions as a faster way to acquire more capacity and expertise than to develop in-house”, assess the analysts.
However, Eletrobras’ size may limit opportunities, as the acquisition would have to be significant to impact the company’s balance sheet.
“That said, we estimate that Eletrobras will potentially take advantage of its large size and comfortable balance sheet position and pursue brownfield opportunities (already existing), as well as diversification into other segments besides distribution and generation”, points out Goldman.
The expectation is that the factors mentioned above, associated with the renewal of some concessions, may lead to an increase in Eletrobras’ Ebitda of up to R$14 billion in the medium term, reaching approximately R$27 billion in 2029. Without capitalization, Ebitda would reach R$ 11.6 billion. Currently, Ebitda stands at R$ 15 billion.
Goldman also sees potential for listing and selling Eletrobras subsidiaries. The state-owned company currently has a corporate structure with several other companies. Being a corporation, it could spin off or sell part of its holdings, which would help better price the company’s underlying assets.
Less speculation, more value
For analysts Pedro Manfredini, Flavia Sounis and Bruno Vidal, who signed the Goldman report, the operation could unlock between R$65 billion and R$70 billion in value for the state-owned company’s shareholders, practically doubling the company’s market value, currently around R$ 68 billion.
UBS BB has a buy recommendation for Eletrobras PNB (ELET6), with a target price of R$ 70, a potential increase of 64% compared to Thursday’s close. In the case of non-privatisation, the target price is R$ 30 (29% lower than the quotation on the 14th).
Even without taking into account the capitalization process, Goldman Sachs has a positive vision for Eletrobras. Analysts last week reiterated their buy recommendation for the shares, with a target price of BRL 46 per ELET3 share (upside of 6%) and BRL 51 for ELET6 (upside of 20%).
However, should privatization take place, the upside potential is much greater, with Goldman projecting to see the ELET6 share exceed R$74. In the post-capitalization scenario, based on potential efficiency gains, use of tax credits and optimization of the corporate structure, the price of ON shares could be in the range between R$ 65 and R$ 67.60 (up potential between 50% and 56%) and, in the case of PNB shares, between R$ 71.80 and R$ $74.60 (appreciation between 69% and 75%).
Giuliano Ajeje, director of UBS BB, said at a TCU event on the subject that important global pension and infrastructure funds are studying the operation. According to him, today Eletrobras is seen by investors as a speculative company, and the expectation is that privatization will bring more predictability about the company’s future.
“The window we have today is very positive. When we talk about the possibility of putting the operation into the second semester, we start to run the risk of (the window) getting worse or closing. We will have elections, we do not know the outcome of the war in Ukraine,” he said.
Schedule on the radar
Currently, the Union owns 72.33% of Eletrobras’ voting capital – with privatization, this percentage would be reduced to 45%. The State’s share in the company would be diluted with the issuance of new shares.
With the corporate restructuring, the Union would continue to control Eletronuclear and Itaipu and continue with sectorial programs, including Procel and Luz para Todos.
The privatization model also provides that shareholders will only be able to vote with up to 10% of their capital, regardless of the size of their stake in the company, which would make Eletrobras a company without a defined controller.
The BNDES calculates that the entire process could move R$ 100 billion. Around BRL 20 billion are expected with the grant (initial offering) and BRL 80 billion from potential secondary offerings from the sale of remaining shares.
Eletrobras: privatization enters decisive phase at TCU; know what’s at stake
The ideal scenario for investors is that the process involving launching the offer and seeking investors is closed before May 12th, so that the auction takes place on the 13th. Thus, it will come out in 2022 and will not be affected by the elections.
As Minister Vital do Rêgo is due to ask for a view this Wednesday, to still give time to complete the procedures for the company’s privatization operation next month, the view period could not be longer than seven days, extending the trial. final date for the 27th, which is still seen as a short time to hold the auction on the 13th of May.
It should be noted that the TCU regiment determines that requests for inspections cannot exceed 60 days and the definition of the term must be collective, in a vote of the ministers of the Court.
The base-scenario that is being drawn at the moment is for the plenary of the Court to vote for a shorter period for the minister to return the case. However, it would be a period longer than seven days: as highlighted by the newspaper The State of São Paulobetween 20 and 30 days, which would make the operation unfeasible next month.
But there is still another window on the radar, which would lead to the postponement of the offer to mid-August. According to a manager who closely follows the operation, the postponement to August would not make the operation unfeasible, but would make the offer more uncertain, depending on market conditions during the month and even more taking into account the approach of the elections. However, he still sees chances of the process being completed in May.
It should be noted that, in addition to the second and final approval by the TCU, Eletrobras still needs to go through some internal steps, such as the publication of form 20-F at the SEC, the US CVM, and the offering prospectus.
Paulo Guedes, Minister of Economy, said that privatization will strengthen the company’s cash, at a time when the world is discussing the transition from the current energy model to one that is less polluting and more sustainable.
“We are leaving a past legacy of this beautiful company, the largest in Latin America in energy generation, transmission and distribution, but which has been reaching its limits. Today, Eletrobras would need to invest R$ 15.7 billion per year to maintain the same level of relevance, but it can only invest R$ 3.5 billion. There are visible signs that, if Brazil grows as we expect it to, in the coming years the company, with its current corporate structure, will not be able to [manter] investment capacity, not only putting itself at risk, but also jeopardizing the future of energy security in Brazil”, he said at an event promoted by the TCU to discuss the modeling of the company’s privatization process.
For BNDES, if privatization does not go ahead, there is a possibility that the Angra 3 nuclear plant will not be completed and, consequently, be closed. The works on the project, which are in charge of Eletronuclear, part of Eletrobras, have been paralyzed since 2015 because of allegations of corruption and overbilling.
The renewal of the concession for the Tucuruí hydroelectric plant, which is also currently operated by Eletrobras, would also be at risk. “The company and the Brazilian society may have to bear the costs as a result of this”, stated Gustavo Montezano during the TCU event.
Rodrigo Limp, president of Eletrobras, pointed out at the event that, “despite the positive evolution in all financial indicators, the company has been losing share in the sector, both in generation and in transmission”, highlighting its reduced investment capacity.
“When we look at the future of the company, the business plans foresee the investment, until 2026, of R$ 39 billion, that is, an average of R$ 8 billion. In 2022, the estimated investment value is BRL 5 billion. That is, the expectation is that this value will grow from 2023, with privatization”, he evaluated.
(with Estadão Conteúdo and Agência Brasil)
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