Odebrecht | Risks and Riches

Maracanã undergoes reconstruction

2013 has so far been a time of trials for the Brazillionaire, a caste that has benefited significantly in recent years from the Lula government’s ambition to breed and incubate Brazilian multinationals with acquisitive power — think of JBS-Friboi’s takeover of the venerable Swift & Co.

The most visible sign of decline has been the performance of companies in the Eike Batista group, whose OGX petroleum subsidiary leads losses recently in the BM&FBovespa and is reportedly seeking outside and foreign investment.

Via Brasil 24/7.

With close ties to PT, Odebrecht carries $R 62 billion in debt

The Odebrecht group, which operates in the petrochemical and biofuels markets, produces nuclear submarines, participates in the management of the Maracanã football stadium and is one of the companies benefiting most from the amended Port Law, has run up debts equivalent to 3.5 times its net assets of R$ 17 billion.

Water Over the Dam | Will Investors Take the Plunge?

Source: Brasil Econômico | 24 January 2013
Tenor: Market is moderately cautious over energy-sector pricing reform
Excerpt | Translation: C. Brayton

Negative pressure on shares is transitory and reflects the continued uncertainty of investors. The BM&F Bovespa’s electricity and energy sector index (IEE) is down 1%.

The reduction in energy bills announced by the president on January 23 has had a limited negative impact on the shares of electricity generators, transmitters and distributors.

Pedro Galdi,chief analyst at the SLW Corretora brokerage house, explains that the government has already absorbed part of the losses suffered by some companies. 

M&A & The New CADE

I read it in O Globo, which cites the findings of PwC: Brazilian M&A deals in 2012 — 770 — up 2.5% from 2011.

I read recently — without recollecting where — that Brazil’s antitrust regulator is undergoing some structural changes in order to streamline bureaucracy and catch up to its Dickensian backlog of cases.

An interesting question to consider: how will streamlined due process affect rule-enforcement at a regulator recently redesigned and given new powers.

The government visibly wants deals cleared efficiently — part of its industrial strategy is creating international JVs and Brazilian multinationals.

Confession: This is one of those topics I need to read up on before venturing an opinion. Mondaq has a thorough article on the topic, and the blog Fusões e Acquisições is a useful and up to date lusophone source .

In the meantime, I will jot down some notes — my rough & ready translation — and then present selections from catalog of significant deals prepared by the ever-reliable Valor Econômico.

Greasing the Wheels

Source: Administradores.com. Begin translated excerpt.

M&A deals should be dealt with more rapidly by a less bureaucratic procedure in the coming months. The federal Chamber of Deputies is considering a bill — PL 3937/04 — that proposes further structural changes in the antitrust regulator CADE.

By the number assigned, it seems that this bill was introduced in 2004 and is only now making its way to the floor for a vote. As a matter of fact, a look at the legislatve record seems to indicate it is still occupying real estate on the  mesa, though it is classified as urgent.. 

Brazilian Electricity Wars | The R$ 5 Billion Feud

Surprisingly informative:

• Electricity sector in Brazil | Wikipedia

The history lesson is especially useful, as are the league tables – which may need touching up, however. The Brazilian government has set up a useful informational page on the New Model for the Electricity Sector, passed in 2004. Three of the largest state-owned — as opposed to federally-owned — generation groups are refusing to play ball.

IstoÉ Dinheiro magazine leads with a mocking headline:

Honey, I Shrank CESP

São Paulo electricity concessionaire will lose nearly 80% of its revenues by 2015. Learn how other companies who refused the federal plan to reduce electricity bills are faring.

After a period of intense political gamesmanship, scores of Excel spreadsheets and a sharp decline in their share prices — an estimated R$19.2 billion — Cesp, Cemig e Copel decided last week not to accept the federal goverment’s new rules for the electricity sector.

The three companies represent 60% of the generation capacity in play as part of Dilma Rousseff’s plan to reduce energy prices by 20% in 2013.

The most emblematic of these is Cesp, whose directors are overseen by governor Geraldo Alckmin of the opposition PSDB. In saying no to the proposal, the state-owned CESP will lose 77.8% of its revenues starting in 2015. Based on data from 2011, this implies a loss of R$ 2.3 billion in cash reserves, currently at R$ 3 billion.

[Caption] Alckmin: Govenor prefers to reduce the size of CESP rather than reduce the lighting bill of São Paulo residents.

“CESP will become a minor company,” says Ricardo Corrêa of the Ativa Corretora brokerage firm.

In Minas Gerais and Paranhá, respectively, Cemig and Copel have renewed their transmission concessions but plan to give up a number of generation plants, and so will suffer the same effects in 2015.

The three companies have three PSDB state governments as majority shareholders: the Alckmin government, in São Paulo, along with Antonio Anastasia in Minas Gerais and Beto Richa in Paraná. In turning down the concession renewals, these state-owned firms may make it impossible for Dilma Rousseff to keep her promise to reduce the average energy bill by 20,2% starting in March 2013.

Leaving out Cesp, Cemig and Copel, the guaranteed savings would be just 16.2%, according to data from the ministry of mines and energy.

We will take it, for now, and thank you very much.

The president, however, seems firm in her desire to provide cheaper electricity. “Reducing the price of energy is a decision from which the government will not back down, although it laments the lack of sensitivity on the part of those who fail to recognize the importance of this step for the sustainable growth of our economy,”Dilma told a group of business executives in Brasilia on Wednesday.

To realize its target, the government has a tax gambit up its sleeve, market analysts say.

“All it takes is a reduction of the PIS/Cofins tax on the energy bill,” says Nivalde de Castro, coordinator of the energy studies group at UFRJ.

Amid an exchange of accusations with the federal government, São Paulo says that the CESP decision was entirely technical.

Proof of this, according to state energy secretary José Aníbal, is that another of São Paulo’s state-owned firms, EMAE, accepted the federal government’s conditions and signed the contract. In the case of Cesp, the difference between the indemnity for unamortized investments offered by the feds and the sum judged correct by the state is R$ 5.4 billion.

Márcio Zimmermann, federal executive secretary for mines and energy, says: “We cannot understand the logic that led this company not to renew its concessions.” But CESP accepted lower energy prices, according to Anibal, it would have difficulty honoring existing energy contracts, worth R$130 Mw/h on average. “They suggested we buy this energy on the free market, but the price there is R$ 200 Mw/h,” Anibal said. “I challenge the federal government to show us their calculation. The situation of Cemig and Copel and very different from that of CESP. On Wednesday, Djalma de Morais, CEO of Cemig, took part in an analyst conference call and said that eventual losses, and especially those in the area of transmission, will be compensated with internal adjustments.

“Our plan provides for a 20% reduction of operating expenses in this segment, as a method of controlling costs,” Morais said. The CESP executive announced that the company will maintain its investment plan and, if necessary, will go to court to guarantee the right to renew concessions under the old rules, which apply to 3 of its 21 generation plants.

In the Senate, Aécio Neves (PSDB-MG) gave a speech in which he accused the presidency of “committing a foolish act in tryiing to reduce the price at the cost of bankrupting the sector.”

Currently, generation is responsible for 40% of Cemig revenues. Transmission accounts for another 20%. The rest is accounted for under “other businesses,” which include supplying natural gas to residences and industry.

“In the future, gas may also be used to generate electricity,” says Luiz Fernando Rolla, Cemig COO, who does not rule out the acquisition or construction of new plants.

Copel is already traveling down that path. By year’s end, the Mauá and Cavernoso 2 generating plants, with joint capacity of 380 MW, will begin operations. That is more than the 272 MW in capacity that Copel did not renew. Like Cemig, Copel adhered to the federal program only with respect to its transmission assets. In this case, the company took a hard blow. “Our revenues in this area are down 58%,” the company said in a note to investors.

Though they did not release their spreadsheets, Mines and Energy and ANEEL affirmed that the sums offered are more than sufficient to guarantee the profitability of the generation sector. “We do not understand the logic behind the refusal of these companies to renegotiate and renew,” said Márcio Zimmermann

Eletrobras, controlled by the federal government, adhered in full to the new rules, reasoning that a state-owned firm must take into account not only its balance sheet but is social role as well. Eletrobras intends to compensate for reduced income with cost-control measures.

“We will review our expenses and investments in the short, middle and long term,” said José da Costa, CEO Eletrobras. Investors did not like this news and Eletrobras shares plummeted 50%, costing it R$ 11.6 billion in market cap. Cesp, meanwhile, by not renewing its concessions, has laid to rest a persistent dream of the PSDB: to privatize the company.

“Not viable,” said Aníbal. “Who would want to buy a company with two concessions expiring in the next two and a half years?” The only other asset in the company’s portfolio is a large hydroelectric plant in Porto Primavera, whose concession expires in 2028. If it wants to rebuild its profile, CESP will have to compete in future auctions, a possibility no discarded by the S. Paulo state government.

7D | A Mexican Standoff?

On 7D, nothing will happen

Argentine media group Clarín announces a stay of execution.

It says it will not be required to comply with the 2009 Ley dos Medios until all appeals have been exhausted.

As soon as [the court] extended the stay in the case challenging the constitutionality of certain provisions of the media law, Clarín issued the following statement:

The Grupo Clarín has just been informed that the injunction has been extended until a definitive ruling on the constitutionality of provisions of the Media Law  has been arrived at.

As it has throughout the process,  Grupo Clarín will follow the law, respecting the Constitution, the law, and the findings of the courts.

Eric Nepomuceno of Brazil’s Observatório da Imprensa summarizes the case, below.

As it happens, and contrary to the image of a deeply polarized debate, there is internal disagreement among shareholders in the Clarín group over compliance — I will translate that, too. But first,

The Electricity Bill | Shock Therapy

t

Addendum, December 6, 2012: a nice infographic listing the players in the electricity setor and their adherence to the federal rate-setting plan:

It is always gratifying when a genuine expert reaches much the same conclusion as your own murky thought processes. See, for example,

• Electricity in the Concessionaire | The New Price of Voltage

Regarding the confused and heated debate recently over the renegotiation of electrical concessions in Brazil, I had also guessed that the following might be true:

Many banks are issuing sell recommendations to investors and buying for their own account.

Press coverage of PL 579 — a executive order that calls for the state and energy providers to renegotiate concession contracts in the electrical sector after a number of years divided into “captive” and “free market” energy trading sectors — may well be a perfect case of «moral panic», as defined by students of rhetoric, public relations and propaganda.

In the world of fact, negotiations continue between governor and the electrical sector, with Dilma showing signs of reformulating how to calculate the sums needed to repay the electricity companies for changes they are being asked to make in the name of long-term sector strategy.

Assis Ribeiro files this analysis — by Najar Tubino – on the blog of Luis Nassif.

A massacre, an earthquake, devastation, a climate of fear and tension, an imminent explosion, a minedield, an orphaned capital market, a situation verging on mass bankrupcy. These are some of the expressions used during November to define PL 579, which deals with the renovation of concessions with electrical utilities and the lowering of energy bills for residential, commercial and industrial consumers.

The story is by Najar Tubino.

In the face of such descriptions, I decided to tone down the rhetoric, even though these were the labels being used by the daily Valor, a business-oriented joint-venture of the Organizações Globo and the Folha de São Paulo. One might correctly call Valor an arm of the two publishing giants, given that it sells hundreds of pages of ads at a minimum price of  R$130,000  – just as it publishes the quarterly reports of Brazil’s major corporations and prints the opinions and analysis of leading figures in the economy, and especially the capital markets.

The soap opera always works out the same. An “anti-market” government policy is targeted, such as the recent reduction in interest rates, which took analysts by surprise. Next comes an avalanche of articles, analysis and expert prognostication —  usually from economists employed by brokers or consultancies.

Valor is a newspaper I read regularly,, with close attention, and I have read its attempt to undermine MP 579 with the same attention.

Me, too.

But to the facts. For two years the national electricity regulator ANEEL has been discussing with industry “players” as they call themselves, certain changes in the definition of energy costs. Each year, ANEEL publishes the figures on depreciation of assets, as it is known in the industry, which are assigned to the concessionaires under the terms of contracts signed decades ago — 30 years on average. Some of these will expire in 2015 and 2017. This includes generators of all types: hydro, thermal or wind power. It also includes transmitters who maintain the lines — all 98,000 km of them — substations and regional distributors that bring light and power to many different customers: residential, industrial and commercial.

Scheduled for renewal are 58 generators, with combined capacity of 21,500 MW – 20% of the market — as well as 73,000  km of transmission lines, some 83% of the basic network of the National Integrated Sysytem and 30% of the distributors market, comprising contracts with 41 companies. The renewal deadline for those accepting the government’s  terms is December 4.

Of this total , 67% of generation is managed by Eletrobras — 62% of transmission and 25% of distribution. Electrobras is a public-private partnership, a «mixed economy» company, with shares traded in São Paulo, N. York and Madrid. It accounts for 60% of the generation market and 40% of transmission. In other words. it dominates the market., The federal government holds 58% of the shares, including a portion owned by BNDES, but JP Morgan has some 8% of the voting shares.

Panic Attack

The Norwegian fund  Skagen is also a participant, with 1% of the ON and 17.5% of the PN of Eletrobras, and says it has as R$3 bi invested in Brazil.

The PR department of this firm has produced a most hystericial demonstration of European power over us poor Tupi indians, mired as we are in the emerging world.

“We have the financial means to take this case to court. Brazil is turning into another Argentina, and the market has taken note. The government is looking to nationalize the sector.”

Aside

If I remember correctly, many of these PPPs are structured so that private investors maintain the right to name a board and vote their 49% of the shares. Chesf is one such company, I think.

State-run board members can take back the power with a plain old share repurchase, if the government wants it, too..

Since 2003, the sector has been overseen by the ONS — National System Operator — which

 is responsible for the long-term planning of the electrical sector and adminsters the EPE — Energy Research Corporation — to that end. It also organizes the  CMSE,  which monitors security of the energy supply, and MAE — the wholesale energy market —  which deals with transactions realized in the MAE and involving electricity sold through the Sistema Interligado and registered by the CEEE, the electrical energy clearinghouse.

I had a cheat sheeet here somewhere on this topic, let me look.

At he beginning of the year, the Skagen fund was worth R$1.3 billion and in November stood at R$730 million.

Also under the heading “hysteria” we might include a known Brazilian columnist who wrote:

– Eletrobras has lost 70% of its market value and runs a serious  risk of default.

The columnist ignores the fact that Eletrobras assets include 30 hyrdoelectric plants, 15 thermal, two nuclear plants, 190 substations and nearly 60,000 km of transmission lines.

It also owns half of Itaipu – a hydro operation of some 7,000 MW – as well as an equal share in others: Chesf, Eletronorte, Eletrosul, Companhia de Geração Térmica de Energia (CGTEE) and seven other distributors. The latter are considered “subprime” because they operate at a loss — they include companies in  Alagoas, Piauí, Amazonas, Acre, Rondônia and Roraima. Eletrobras is preparing to acquire 50% of the distributor in Goiás.

A portfolio of assets such as these can only disappear from market calculations because investment banking analysts calculate that share prices no longer correspond to market value.

It is here that the topic “the massacre of the electric companies” emerges, one of dozens that Valor has written on the subject. First of all, the shares of these companies are considered “defensive” — they are not expensive, and show no price volatiity, but continue to yield generous dividends at year’s end.

By law, companies listed on the Bovespa must distribute 25% of prophets to shareholders. The electrics, however, distribute more than 90% — as is the case with Eletropaulo.

So who are the experts selected to be interviewed? Representatives of U.S. or U.K. banks, known for their role in the 2008 crisis… repackaging fixed income assets and selling them to funds all over the world, at a handsome profit.

Such is the case with Goldman Sachs, JP Morgan, and Barclays. At the latter, the standard spokesperson has set the target price for Eletrobras at R$1 per share. Itaú was more generous: R$8 per share. In late April, common shares were at  R$9.69. The company had “lost” more than half its market value: from R$26 bi to R$11,6 bi.

But let us also listen to investor Luiz Barsi Filho, 73, a highly sought after commentator who lives off his dividends.

“A country cannot fail to invest in energy if it sincerely intends to encourage development;. The controversies have not been resolved, but the utilities will be the ones to suffer from the impasse. This might, however, represent a golden investment opportunity. Personally, I am long on electrical energy.”

Barsi is not alone. Many banks are issuing sell recommendations to investors and buying for their own account. But his approach is outmoded as well. I decided to check some of the analyses by these same analysts in 2010 and 2011. I found the same information in the business weeklies. One of them, Exame (Grupo Abril), listed 12 companies that paid the best dividends according to a survey by Economática — a research company headed by a former Banco Central president.

M&A, Gringo to Gringo?

Meanwhile, Relatório Reservado — a daily market rumor  newsletter — narrates the troubles reportedly encountered by two foreign players in the changing domestic landscape. I translate a selection:

There is a frenzied climate inside the Brazilian offices of  GDF Suez and Duke Energy. The government’s proposal to reduce energy prices has scribbled a question mark over what should have been one of the biggest M&A deals in the sector in years.

Some four months ago, GDF Suez was negotiating the acquisition of Duke Energy’s Geração Paranapanema. According to a source close to the U.S. group, the money on the table is around R$6 billion.  Duke controls practically  all the stock in Paranapanema — only 5.72% are publicly traded.

This newsletter discovered that the two parties intended to seal the deal sometime in 2012 — due diligence is said to have been complete last month. Now, however, with the government’s decision, the deal looks hazy. The facts have changed and so has the timing of GDF Suez …

Risco Brasil | Courts Uphold Derivatives Contracts

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so  far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are  potentially lethal. –Warren Buffet 2002

“It’s an established fact: corporate governance in Brazil is divided into two periods: before the derivatives scandal and after it.” –Rodrigo Zeidan, Fundação Dom Cabral.

According to research performed for the Folha de S. Paulo — and not, for some reason, by the FSP — courts are tending to uphold the caveat emptor school of thought on the subject of

I translate. Author: Adriana Aguia, Valor Econômico |  Portal ClippingMP.

The exchange-rate derivative contracts that pressured the finances of such major business groups as Sadia, Aracruz e Votorantim, causing billions of dollars in damage during the panic of 2008, are now being  recognized as valid by the Brazilian judiciary.

During the 15 minutes of fame generated by the Aracruz and Votorantim “too big to fail” derivatives cases, Brazil’s SEC, the CVM created and issued a new accounting form — above — in which derivatives contracts would be reflected on an appendix to the quarterly books.

In 2010, CVM issued Instruction 486/10,

which deals with the execution and clearing of derivatives contracts negotiated or registered in organized trading venues: the stock market, the commodity and futures market, and the organized OTC.  The main objective of Instruction 486/10 is to support information-sharing on derivative transactions conducted in the market or in an OTC by the oversight bodies of the stock, commodities and futures exchanges, in keeping with certain recent and unprecedented tendencies in the Brazilian market.

Brazilian TV | And Then There Were Three?

From Portal IMPRENSA, an item for a tropical Portuguese Dealbook.

Brazilian billionaire Eike Batista may enter partnership with Rupert Murdoch to buy a TV broadcaster in Brazil.

Excellent: Brazilians will now know what it is like to have a foreigner with deep pockets, murky motives, and Machiavellian methods attempting to influence public opinion in someone else’s country.

Seriously, though: if true, the deal for the SBT network could represent a further erosion of the Globo-Record TV duopoly.  In recent years, SBT has overtaken Record on occasion in the ratings but tends to lose share.

Australian magnate  Rupert Murdoch recently approached  Eike Batista to propose a TV partnership in Brazil, according to Veja magazine’s “Radar” column, dated September 30.

According to the Veja columnist, Murdoch would take a 30% share.

This represents the maximum stake a foreign company may take  in a national media group, by law.

Grosso Modo | The Newsstand’s Last Stand

Pillboxes: The face of New York City’s brand new news kiosks

We pull into a rest stop along the Anchieta-Imigrantes before descending through the foggy Serra do Mar to the North Shore.

Along the way, we visit the newsstand to buy some magazines for beach reading.

Not only do we discover that our personal must-read CartaCapital is not for sale, but also that virtually every title available in this roadside newsstand is a publication of the Grupo Abril — the market leading publisher of Veja, Exame, Claudia, Superinterresante and many others.

The man behind the counter is nervous and cannot explain the fact.

In 2007, the distribution arm of Abril acquired Chinaglia, the last independent press distribution company in the state, and now enjoys a monopoly in this market. The newly formed corporation is known as Treelog S.A. Logística Distribuição.

Newsstands are an integral part of São Paulo’s urban ecology, and newsstand owners, like taxi drivers, are useful  pressure points if you want to take the pulse of the city. Some feature Abril on their marquees, others Editora Três or Globo, and still others reserve the display window for Carta Capital.  But newsstand owners are almost always reticent to discuss their relationships with their distributors.

The same is true in New York  – or used to be true until the Spanish company Cemusa bought up the majority of independent street kiosks. The process of obtaining a license to mount a kiosk still requires that no one individual own more than one stand. (Source: Vanishing New York)

My impression — possibly ingenuous — was always that market forces dictated how much of what these independents ordered from their wholesaler, depending on customer demand.

My old newsie at Wall and Water was sharp this way: he knew what you wanted better than you did. And naturally, he ordered the W$J by the bucketful, and so many The Nations.

Cemusa’s Brazilian subsidiary is active in bus stop and news kiosk advertising in  five Brazilian capitals, but not São Paulo, as far as I can see.

At any rate, Danielle Naves de Oliveira, writing for Observatório da Imprensa – 25 September 2012 — compares this situation to a print distribution industry standard in Germany, and I translate.

Here is a case that resembles our own situation.

Aristegui | MVS Loses Frequency

Proceso magazine reports:

In a classic end-of-mandate move, Mexican president Felipe Calderón, acting through his communications and transportation minister, Dionisio Pérez Jácome, has decided to benefit the Televisa media group by refusing to renew the 2.5 GHz bandwidth concessions  previously awarded to MVS Comunicaciones.

MVS broadcasts the daily radio program of CNN Español anchor Carmen Aristegui, author of remarkable investigative reporting on election fraud in 2006, among other notable work — the Hildebrando and ChoicePoint scandals, for example. She worked at W Radio until 2003, when her contract was not renewed.

She was fired  for alleged ethical lapses by MVS in 2011 – she had asked questions about the alleged alcoholism of Mexico’s president. She returned to MVS with her own branded channel earlier this year, and was named a knight commander by the French just this summer.

Experts contacted by Proceso say that MVS, owned by the Vargas family, lost the spectrum after having failed to prove its economic viability and its capacity to bring broadband Internet access to a large portion of the population. With the restructuring of the concession, it is quite clear that the only party to benefit will be the monopolistic consortium controlled by Emilio Azcárraga Jean.

The company has operated at 2.5 GHz since 2002, one reads. The concession is valued at some US$ 58 billion over the next 20 years.