Brazil Electric Consolidation Seen Picking Up in 2013--Firm
07/05/2012| 05:30pm US/Eastern
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By Paulo Winterstein
SAO PAULO--Mergers and acquisitions in Brazil's power industry are likely to heat up at the start of next year as Europe fears fade and investors have a clearer view of growth in Latin America's biggest economy, the law firm that assisted China's State Grid in its buy of Brazilian assets said Thursday.
"There are a lot of projects in the pipeline and when financial conditions are more favorable they're going to happen," said Jose Roberto Martins, a partner at Trench, Rossi & Watanabe who is in charge of energy, mining, petrochemical and infrastructure projects. His firm advised China's State Grid in its purchase of Brazilian assets from Spain's Actividades de Construccion y Servicios SA for 1.86 billion reais ($919 million).
Brazilian utilities have already seen some consolidation this year, with many wind-power projects being bought out and transmission assets changing hands. Cemig, the utility controlled by the state government of Minas Gerais, is seeking to raise more than $800 million for its transmission unit Taesa to help it expand, in part through acquisitions. CPFL, meanwhile, is spinning off its renewable-power generation unit, through which it seeks to double renewable-energy generating capacity by 2014. Trench Rossi assisted CPFL in buying hydroelectric and wind-power assets earlier this year.
It's precisely in the areas of transmission and wind power that Mr. Martins expects to see the strongest consolidation.
"There's no way to avoid mergers and acquisitions in the wind sector, and I think that we're going to see a lot of that over the next two years," Mr. Martins told Dow Jones in an interview. "Transmission is also hot and we see a lot of things happening."
European companies had a big hand in expanding Brazil's power network, and the current crisis on that continent has led some companies "to monetize their assets" and seek buyers.
But with investor fears still high as large debt loads hang over the heads of European governments and growth in Brazil continues to disappoint, merger activity will likely stay cool this year, he said. The over-dependence of investors on national development bank BNDES for competitive loans is another impediment to takeovers.
"The model so far has been via BNDES, with the electric sector receiving a big part [of resources.] But with demand from other areas it may not be enough for what investors need in the electric sector," he said. Because of Brazilian companies' traditional dependence on BNDES "few people have experience with project financing. Everything is standardized because of BNDES" and that has limited the creativity of companies when seeking funding, he said.
The government earlier this year created infrastructure bonds that are exempt from income taxes in an effort to create alternative financing sources. But lingering legal concerns--such as where liability lies in the case a company doesn't complete a project--have hampered the emission of such bonds.
"The Brazilian electric industry has a lot of pre-operational risk," Mr. Martins said. "You have to have a well-designed product that can provide some guarantees."
With Brazilian industrial production slowing, electric companies also face the risk of overestimating future demand and revenue. That makes deals similar to the one struck by mining company Vale SA (VALE, VALE5.BR) with Australia's Pacific Hydro more attractive, Mr. Martins said.
Vale said last month that it will invest, together with Pacific Hydro, BRL650 million to build two wind farms in northeastern Brazil. Such agreements stimulate power projects because utilities don't have to guess what future market demand will be and can sell directly to a customer whose power needs are known.
Write to Paulo Winterstein at paulo.winterstein@dowjones.com
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