Eletrobras plays down risk of renationalisation under new Brazilian government

Eletrobras has played down the possibility of the recent privatisation of the $19bn-valued Brazilian group being reversed by the future administration of leftwinger Luiz Inácio Lula da Silva.

Government control of Latin America’s largest power utility was ended through a R$33.7bn ($6.3bn) share sale this year, fulfilling a key reform pledge of the outgoing rightwing administration of Jair Bolsonaro.

The deal in June reduced Brasília’s ownership of Eletrobras to below 50 per cent and ranked among the top-three public equity transactions globally in 2022, according to data provider Dealogic.

President-elect Lula has voiced strong opposition to the sell-off, raising concerns that the process could be reviewed, as is desired by some of his allies and advisers.

However, Wilson Ferreira Júnior, Eletrobras’s chief executive, told the Financial Times that he saw no risk of renationalisation thanks to legal protections designed to prevent an unfriendly takeover of the Rio de Janeiro-based business.

These include a ‘poison pill’ provision in its corporate statutes, which would force the government — or any other shareholder seeking to gain control of the publicly-listed group — to pay a 200 per cent premium.

“To renationalise [Eletrobras] would cost three times its value. I believe this is a disincentive. Not even half of those funds exist,” he said in an interview. “It will remain a company of private capital.”

Another safeguard prevents any single investor from exercising more than 10 per cent of voting rights, irrespective of shareholding size.

Centrais Elétricas Brasileiras, as the utility is formally known, is responsible for about 30 per cent of Brazil’s power generation, the vast majority of it from hydroelectric dams. It also operates wind and solar assets, thermoelectric plants and transmission lines.

Eletrobras shares registered a sharper drop than the local Bovespa index in the weeks following Lula’s narrow election victory over Bolsonaro in October. Its São Paulo-listed ordinary shares are now trading slightly above the R$42 level agreed when the government reduced its stake.

Investors are worried about the direction of economic policy under Lula, who served two terms as Brazil’s president between 2003 and 2010.

The 77-year-old veteran leftist intends to scrap a fiscal rule limiting increases in public spending, boost welfare payments and hand a greater role to the state.

While Lula has not explicitly threatened to bring Eletrobras back into the public sector, his promise of no more privatisations and strident criticism of the divestment have fuelled speculation that it is under consideration.

At the time, Lula referred to Eletrobras’s denationalisation as a “crime against the homeland” resulting in the loss of Brazil’s energy sovereignty.

“If we win the election . . . we are going to restore the sovereignty of Brazil and the Brazilian people,” he tweeted in June.

A person close to Lula’s transition team, who asked not to be named, said that no definitive view had yet been taken on the company.

“It would have to go through an analysis of economic, legal and political viability,” they added. “It will be the president’s decision, based on studies that will have to be carried out.” 

Eletrobras and the wider Brazilian equity market fell in mid-December after the country’s lower house of Congress voted for a legislative amendment, which now goes to the Senate, to make political appointments easier at state-controlled enterprises.

Although no longer in that category, as a regulated entity Eletrobras could be subject to government influence in ways other than renationalisation, such as changes in sector rules or taxation, according to some analysts.

“A possibly more interventionist government has been priced in, which uses the economy and companies for the sake of politics,” said Davi Lelis, economist at Valor Investimentos.

Backers of the privatisation argued it would attract more capital for investments and even lead to lower electricity bills, but opponents claim it will result in higher tariffs for consumers.

Ferreira said that in private hands, Eletrobras was freer to embark on a turnround plan to improve efficiency and slash overheads. A voluntary redundancy programme has already been accepted by by close to 2,500 employees, or almost one-quarter of the workforce.

“As the biggest generation company in Brazil, we want to use this scale to operate as the most efficient and at the lowest cost,” added Ferreira, who recently rejoined following a previous stint as chief executive between 2016 to 2021.

“We are looking to be the company with the highest total shareholder return in the sector.” 

As the leading renewable electricity generator in Latin America, Eletrobras has the potential to be a force in so-called ‘green’ hydrogen, said Ferreira.

The gas is viewed as a fuel of the future because its combustion only results in water as a byproduct. It can be produced by using electricity to split water into H2 and oxygen, in electrolysis units powered by clean energy.

“Lots of our operations are on the Brazilian coast, which will allow us to be a big producer of hydrogen. I think that Eletrobras will be one of the biggest players in this area, for the internal market and export.”

Eletrobras is also exploring offshore wind, which is yet to be developed in Brazil. It signed a co-operation agreement with oil supermajor Shell in December about possible co-investments.

Antonio Junqueira, an analyst at Citi, said a glut of electricity in Brazil was an issue for the company, especially given an expected rush of renewables projects before government subsidy offers expire.

“On the day-to-day business, the variable everyone is concerned about is power prices. Brazil has structural oversupply. How do you navigate this excess capacity?”

Once the corporate overhaul is complete, investors will want to know whether management intends to raise shareholder payouts or plough more cash back into investments, Junqueira added.

“There’s a sense among investors that the company will become a cash cow — a heavy dividend player”.

Eletrobras swung into a slight net loss for the third quarter, compared with a profit of R$965mn a year before. It was mainly hit by a slump in transmission revenues, which are readjusted according to inflation indices.

Additional reporting by Carolina Ingizza