May 24, 2018 / 3:28 PM / in a month

European utility power struggle goes to the wire in Brazil

MILAN/MADRID, May 24 (Reuters) - A bitter feud over a Brazilian power grid operator has taken a global rivalry to new levels as Europe’s top two utilities ready $1.5 billion-plus bids for Eletropaulo.

Brazil’s biggest power distributor became one of the world’s most prized power assets last month when Italy’s Enel and Spain’s Iberdrola locked horns in a country both see as key to expansion, virtually doubling its value overnight.

Although Enel outdid Iberdrola in an early skirmish with a 32.2 reais per share bid for Eletropaulo, best offers are due on Thursday in a complex bidding process, with sources close to the auction saying there could be room to raise the bar.

Shares in Eletropaulo, which has a market value of 5.8 billion reais ($1.6 billion), stood at 35.4 reais on Thursday, indicating the market expected higher offers.

“We are ready to keep on participating in the process, but for strategic reasons I can’t tell you to which point,” the chairman of Iberdrola’s Brazil unit Neoenergia Mario Jose Ruiz-Table said last week.

Earlier this month Neoenergia agreed debt issuance of 5.5 billion reais ($1.51 billion) and got consent from its main shareholders to make new offers for Eletropaulo.

Meanwhile Enel, which generates more than 25 percent of its earnings in South America, is said to have financial firepower of up to 15 billion euros for acquisitions.

But the price tag has left some investors concerned the utilities could be overpaying, despite obvious synergies with their other businesses in Latin America’s most populous country.

Brazil’s power company Energisa SA dropped out of the race in May while sources said CPFL, the Brazilian power group owned by China State Grid Corp, gave up to focus on other assets, deeming the price too rich.

“The aggressive bidding surprised me. Given their rivalry in Spain, it looks to me like this might have become a question of principle,” Roberto Lottici, fund manager at Ifigest and an Enel shareholder, said.

The Chilean minority shareholders of Enel’s Americas unit have said they oppose the takeover and are not happy with the idea of Enel Americas financing the potential deal.

ITALIAN FRONT

Enel, which controls Spanish utility Endesa, is competing with Iberdrola in Spain and Latin America and recently another front opened in Italy.

The face-off in Brazil has frayed tempers further, leading Iberdrola to write to the European Commission in April alleging state-controlled Enel was taking investment decisions it would not be able to do were it not government-backed.

Brazil is a strategic market for Iberdrola. It helped drive a 24 percent rise in core profits in the first quarter and will absorb a fifth of a 32 billion euro investment plan to 2020.

Buying Eletropaulo would boost its client base in the country to more than 20 million with 625,000 km of grid.

For Enel, a deal would nearly double its Brazilian client base to 17 million. Europe’s biggest utility, which last year bought Brazilian power distributor Celg-D for $647 million, said in April it was keen to grow in the country.

Last week a source told Reuters that Enel would look at any assets of Portugal’s EDP, which is the subject of a bid by China Three Gorges, after a breakup of the utility, which has generation and distribution in Brazil.

Bank of America Merrill Lynch said in a recent report that despite high multiples, an Eletropaulo deal could be 1 percent accretive for Enel by 2021 but 2.4 percent for Iberdrola due to the geographical proximity of assets.

Brazil is the third biggest electricity producer in the Americas with strong growth potential and energy consumption is set to grow 60 percent by 2040, the latest BP Energy Outlook report says.

After years of under-investment and government interference, Brazil has taken steps to improve regulation and investor returns to attract utilities to help upgrade its infrastructure.

A source with knowledge of the matter said the average duration of a blackout on the Celg-D grid was 1,861 minutes compared to 43 minutes in Italy.

“That’s a lot of revenue that can be recouped just by streamlining the grid,” the source said.

Thursday is the last day for offers from Enel and Iberdrola ahead of registration on June 4. Unless, that is, a new investor appears in which case everybody will be allowed to raise bids at a June 4 auction. ($1 = 3.6474 reais) (Additional reporting by Luciano Costa de Paula Editing by Alexander Smith)

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