Brazil's privatization process has stepped up a powerful gear. A mainly federal programme last year, it has now been joined with gusto by the state governments which are putting their own huge assets on the block. Behind them, the municipalities are planning sell-offs too in such sectors as water supply and sewage treatment.
The fact that privatization has been very much taken on board by the individual states and municipalities, despite opposition from such groups as the trade unions, is due in part to aggressive promotion by the federal development bank, Banco Nacional de Desenvolvimento Economico e Social (BNDES). Though not involved directly in state privatizations, the bank is exerting its influence, offering consultancy services on sales and in some cases pushing the states to speed up the sell-offs by offering loan programmes collateralized against future privatization proceeds.
At the same time BNDES remains very busy with its own schedule of upcoming federal privatizations. Telecoms is one important sector but the immediate focus is upon the mining conglomerate Companhia Vale do Rio Doce (CVRD). Everyone concerned with the Brazilian privatization programme, from investment bankers to foreign investors, is looking to BNDES to get this deal done in the near future.
The CVRD sale is viewed as a crucial test of credibility for the entire Brazilian privatization process and is also being watched closely by the state authorities, most of whom are under intense pressure to sort out their finances and curtail public spending. They are anxious for investors to remain focused upon Brazil and to retain international optimism about the prospects for the sweeping restructuring of the country's economy.
The CVRD transaction ran into renewed controversy in December when vast mineral riches were discovered in the Amazonian state of Para. This led to fresh accusations from opponents of privatization that the country's mineral wealth was being sold cheaply to foreign multinationals. Last month, however, new mechanisms were put in place to give the government a share of future revenues associated with these new discoveries and there is widespread belief among investment bankers that the first part of the CVRD sale a mergers-and-acquisitions deal bringing in a core group of strategic shareholders can be closed during third-quarter 1997.
Aside from CVRD, state and federal assets up for sale this year include the last pieces of the railway system, telecoms assets and electricity companies active in generation and distribution. Add all these together and analysts say that privatization proceeds could top $13 billion during the next 12 months.
Three electricity utilities owned by the state of Sao Paulo are causing great interest. Companhia Energetica de Sao Paulo (CESP), Electridade de Sao Paulo (Electropaulo) and Companhia Paulista de Forca o Luz (CPFL) are the main suppliers of electricity to the state, which has a population of 34 million centred upon the city of Sao Paulo, where some 20 million people live. Aside from this large base of residential households, potential bidders will be attracted by the industrial and manufacturing customer base. Sao Paulo is the industrial heartland of Brazil, accounting for approximately 40% of the country's GDP.
Not surprisingly, the three companies up for sale are large. Affording their sales prices will probably require the formation of consortia of substantial international utilities. For example, the 10 gigawatt of installed generation capacity at CESP is twice that of the Tennessee Valley Authority in the United States, and taken together the three companies have a net worth estimated at $23 billion.
Consortia headed by investment banks submitted their bids for the three separate advisory mandates according to deadlines on January 8, 9 and 10. The state authorities are assessing the proposals, including ideas on how to break up the companies into more logical units prior to the sale. The proposals will be graded and given a weighting which will be combined with the price factor the two fees proposed by each bidder for a combined trade sale and public offering. The winners could be announced by the end of March and bankers in Sao Paulo are assuming that a different adviser will be appointed for each of the three deals. The more optimistic bankers think that the first of the three companies could be sold during third-quarter 1997, with the other two likely to follow in 1998.
Beginning again
All three are likely to begin with an M&A transaction, bringing in foreign utilities which will be expected to improve efficiency, introduce better technology and fund the heavy capital investment programmes needed to modernize the Brazilian power sector. Public share offerings are expected only as a second stage.
Octavio Castello Branco, managing director at JP Morgan in Sao Paulo, points out that many of the companies for sale in Brazil's privatization process could benefit from the managerial experience and technical knowledge that strategic shareholders would bring. "That company will be in the hands of experienced shareholders and this will help attract investors for the subsequent global offering," says Castello Branco.
Wouter Rosingh, vice-president at Booz Allen in Sao Paulo, also points to the importance of bringing in strategic partners via trade sales ahead of public offerings. "We are not throwing a lot of paper at the capital markets; we are bringing in strategic buyers with know-how," he says. "This makes companies more attractive by getting experienced management in place, ahead of the second tranche."
CPFL is tipped as the most likely contender to begin Sao Paulo's electricity sector sell-offs; a trade sale is likely to be worth more than $1 billion. "CPFL will go first because it is a pure distributor play and you can sell it without dividing it up and the state of Sao Paulo wants that billion dollars in the bank," says Walter Stoeppelwerth, head of research at Robert Fleming in Sao Paulo. In contrast, the other two companies will need to be broken up into smaller businesses before being sold and potential buyers will need a lot of time to study the various units before bidding.
Also expected to be sold this year is a 33% stake in the voting shares of CEMIG, an electricity utility owned by the state of Minas Gerais, which lies to the north of the state of Rio de Janeiro. CEMIG is a generator and a distributor and is looking for a strong international utility as an equity partner with a view to developing its generating activities in particular.