Chinese power conglomerates becoming dominant forces in Brazil
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An electrical post is seen on a road in Montero Lobato, east of Sao Paulo August 7, 2015. REUTERS/Nacho Doce
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By Luciano Costa
SAO PAULO (Reuters) - Chinese power conglomerates are gradually becoming the dominant force in Brazil's electricity industry, where high debt, a harsh recession and less stringent takeover barriers than in other major markets have stoked a wave of acquisitions.
Since the start of 2015, Chinese companies have been the protagonists in three of the six largest announced electricity mergers in Brazil, according to Thomson Reuters deals intelligence data. The number is poised to grow significantly in the coming months as debt-laden targets speed up their sale for prices and conditions deemed as attractive by the Chinese.
Still, growing appetite does not mean State Grid Corp of China, the world's largest utility, or other Chinese peers will overpay for Brazilian assets, said Humberto Gargiulo, president of Upside Finance, which advised State Grid in prior bids for Brazilian transmission lines.
On July 1, State Grid [STGRD.UL] agreed to buy construction conglomerate Camargo Correa SA's 23.6 percent stake in CPFL Energia SA for 5.9 billion reais ($1.8 billion). State Grid will have to extend the same offer to CPFL's remaining shareholders, which might quadruple the deal's value.
The CPFL deal has helped re-price Brazilian utilities' shares, which this year have gained 49 percent after almost four years of declines.
Likewise, China Three Gorges Corp [CYTGP.UL] is analyzing a number of assets up for sale, people with direct knowledge of the situation told Reuters. No move is imminent, the people said, because Three Gorges wants to carefully assess the implications and value of any deal.
"There are multiple opportunities and potential purchases that we are analyzing ... we want to become a relevant player," Li Yinsheng, the chief executive officer of the local unit of Three Gorges, the world's largest hydroelectric power producer, told Reuters in an interview, without elaborating.
The stampede of Chinese investment into Brazil's beleaguered power industry underscores efforts by the world's No. 2 economy to seek new sources of growth overseas. Proposed Chinese power takeovers have encountered increased opposition in North America and Europe and Australia, adding to Brazil's current allure.
Brazilian Mines and Energy Minister Fernando Coelho has repeatedly said he has "no prejudices" against Chinese takeovers.
Latin America's largest economy has become State Grid's No. 2 M&A destination since 2010, accounting for 23 percent of the $20.1 billion it spent on acquisitions during that period, Thomson Reuters data showed. Brazil acquisitions represented 15 percent of Three Gorges's $27.8 billion worth of M&A deals in the same period.
CPFL will offer State Grid a springboard to expand further in Brazil's power generation, transmission and distribution sectors, according to analysts.
The power conglomerates' shopping spree also represents a boon for Chinese suppliers to the industry that are struggling with a domestic slowdown, executives and analysts said.
Brazilian electricity assets expected to go on the block after years of heavy borrowing and a two-year recession include Geração Paranapanema SA, being sold by Duke Energy Corp (NYSE: DUK), and a stake in Renova Energia SA
Often seen as resilient during downturns, the industry is struggling with declining electricity consumption and the highest borrowing costs in nine years.
"It's evident that these Chinese companies would be willing to temporarily accept some sub-par returns on their purchases ... but be sure that they are not going to overspend," Upside Finance's Gargiulo said.
(Writing and additional reporting by Guillermo Parra-Bernal; Editing by Christian Plumb and Grant McCool)
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