Eletrobras in talks for Neoenergia stake: sources

RIO DE JANEIRO (Reuters) - Brazil's state-led utility holding company Eletrobras is in talks to buy Spanish utility Iberdrola's (IBE.MC) stake in a local power distributor in a bid to boost the state's presence and limit foreign involvement in the industry, three senior officials with knowledge of the situation told Reuters.

Eletrobras (ELET6.SA) could buy Iberdrola's 39 percent stake in Neoenergia (GNAN3B.SO), according to the three sources, who asked not to be named because of sensitivity of the issue.

State development bank BNDES BNDES.UL and the pension funds of state-controlled Banco do Brasil (BBAS3.SA) and oil company Petrobras (PETR4.SA) may help fund the deal, according to the sources.

The government wants to prevent cash-rich foreign companies such as China's State Grid STGRD.UL from outbidding Eletrobras for assets that provide electricity to residential consumers, the sources said.

The federal government has also given Eletrobras the task of coming up with a plan to boost investment and foster competition to lower electricity rates across Brazil.

Brazil's government is studying plans to consolidate the country's 63 power distributors around three main groups -- one led by Eletrobras, another by Cemig (CMIG4.SA), the utility controlled by Brazil's Minas Gerais state, and CPFL, a utility in Brazil's Sao Paulo state, a source said.

"The government has made it very clear that it does not want State Grid to buy the Iberdrola stake. The electricity distribution sector is strategic," a source said. "It is not going to let them buy the Iberdrola stake, and getting money for Eletrobras is not a problem."

Executives at State Grid could not be reached for comment.

The concerns about China came after the government limited foreign oil companies' involvement in future development of offshore fields, sought to restrict foreign purchases of farm land, and expressed concerns about the possible sale of ThyssenKrupp AG's (TKAG.DE) giant steel mill in Rio de Janeiro to a non-Brazilian buyer.

State Grid already owns electricity transmission lines in Brazil. The government, is willing to let Eletrobras form a partnership with State Grid to bid for transmission line concessions, Eletrobras Chief Executive Officer Jose Costa Carvalho told reporters in Rio de Janeiro on Tuesday.

If there is more foreign investment in electricity, it should be concentrated in electricity generation, which the government doesn't see as important strategically, the sources said.

Companies such as AES (AES.N) GDF Suez (GSZ.PA) and Duke Energy (DUK.N) are among the foreign companies with electricity investments in Brazil.

IBERDROLA AND BRAZIL

Chinese state utility Three Gorges beat out Eletrobras for a stake in Energias de Portugal (EDP.LS) in December, paying 2.7 billion euros ($3.43 billion).

Spain's Iberdrola, like many other Spanish companies, has seen capital costs rise and bank lending tighten as concern rises about the country's ability to pay its debts. Selling assets has become an option to raise cash, and Iberdrola has hired banks to seek out buyers for its stake in Neoenergia.

Iberdrola's "need to sell" makes it easier for officials to push for a sale to Eletrobras, one of the sources said.

Neoenergia, in which Iberdrola is the leading shareholder, is the largest private sector power distributor in Brazil, according to its website. While Iberdrola makes most of the operational decisions at Neoenergia, it shares control with two government-led investors, Previ, Banco do Brasil's employee pension fund, and Banco do Brasil.

Neoenergia declined to comment. Iberdrola's press office in Brazil declined to comment.

As part of the restructuring of the electricity sector, the government is also likely to approve a renewal of electricity concessions expiring in the next five years rather than taking them back, as the concessions require, and selling them again at auction, said Mauricio Tolmalsquim, head of the Empresa de Pesquisa Energetica, the government's energy research agency.

"Imagine if we let a concession expire and one of the companies that used to own it can't buy another one; it would be chaos," he said. "You'd still have the company and the employees and their obligations but no hydro dams to provide cash flow, the labor problems alone would be huge."

The government will likely allow companies such as CPFL, Cemig, Eletrobras and others to renew their hydro dam concessions in exchange for reducing power charges, he added.

Most of the expiring concessions are owned by state-owned or state-led companies. By avoiding auctions of the expired concession, they won't have to compete against foreign companies to repurchase their dam rights.

Concessions responsible for 22 gigawatts (GW), or about a fifth of Brazil's electricity generation capacity, will expire between 2015 and 2017. Eletrobras owns the bulk, or about 15 GW of the expiring capacity.

(Reporting by Jeb Blount, Rodrigo Viga Gaier, Fabio Couto and Leila Coimbra; editing by Jeffrey Benkoe and Alden Bentley)