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M&As in Brazil's Transmission Sector: China and Colombia take lead [free access]

July 8, 2017

As a result of the ongoing political chaos and economic crisis, Brazil has witnessed a surge in mergers and acquisition (M&A) activity. Over the last two years, transactions related to distressed assets and divestment deals of both private and state-owned companies have increased. The businesses are also engaged in large-scale debt restructuring and reorganisation procedures, mainly to curb liquidity concerns. This trend is likely to continue even though the Brazilian economy recorded some growth in the first quarter of 2017.

 

The electricity transmission segment in Brazil is also witnessing a rise in M&A deals, as companies worry about raising enough funds to meet their investment obligations. The limited financial capability of existing transmission companies and the significant devaluation of the domestic currency are forcing electricity companies to divest their assets. Centrais Eletricas Brasileiras SA (Eletrobras), the country’s largest electricity company (in which the federal government owns a 54.4 per cent equity share), is seeking to raise capital to overcome the worsening financial crisis by selling stakes in its special purpose entities (SPEs) and distribution companies. Another state-owned utility, Companhia Energética de Minas Gerais (Cemig), is planning to sell assets worth BRL6.5 billion to reduce its debt.

 

These deals provide an attractive opportunity for foreign investors as well, especially for existing assets. High debt levels and a harsh political and economic environment have also meant less stringent takeover barriers in Brazil as compared to those in other major markets. China has become the largest foreign investor in Brazil’s electricity transmission segment as its own economic growth is contracting. Brazil is now China's second largest destination when it comes to investments in the infrastructure sector. It is estimated that since 2015, China-based firms have acquired 21 Brazil-based electricity companies for about USD21 billion.

 

A few large Colombian firms have also started expanding their footprint in Brazil through acquisitions. These include Empresa de Energía de Bogotá (EEB) and Interconexion Electrica (ISA).

 

China expands its footprint in Brazil 

Chinese power conglomerates are gradually becoming the key players in Brazil's electricity industry. Since 2015, Chinese companies have been part of the majority of the announced electricity M&A deals in Brazil. Large Chinese companies, such as the State Grid Corporation of China (SGCC), Shanghai Electric Group, China Three Gorges Corporation, China Communications Construction Company (CCCC) and Shanghai Pengxin Group Company are expanding their presence in the country. Among the companies planning to invest in Brazil are China Southern Power Grid, China Huadian Group Corporation, China Huaneng Group Corporation, State Power Investment Corporation (SPIC) and China Guodian Corporation.

 

SGCC mainly operates through its subsidiary, State Grid Brazil Holding S.A. (SGBH), in Brazil’s electricity market. SGBH was set up in 2010 following SGCC’s acquisition of a 99.99 per cent equity stake from Plena Transmissora—a consortium of Spain-based companies Cobra, Elecnor, Isolux and Abengoa—in seven Brazilian transmission companies for BRL3.1 billion. SGBH acquired five more Brazilian transmission companies in 2012. These companies were owned by Spain-based construction company Actividades de Construccion & Servicios S.A. (ACS). These five companies—Porto Primavera Transmissora de Energia S.A., Iracema Transmissora de Energia S.A., Linhas de Transmissão do Itatim S.A., Araraquara Transmissora de Energia S.A. and Catexerê Transmissora de Energia S.A.—owned transmission assets in mid-west, southeast and north Brazil. In July 2015, SGBH bought two more transmission companies that were part of the ACS group, namely, Linha de Transmissão de Montes Claros S.A. (LTMC) and Atlântico Concessionária de Transmissão de Energia (ACTE).

 

SGBH has thus established itself as the fourth largest transmission operator in Brazil, covering heavy load centres in Brasilia, Sao Paulo and Rio de Janeiro. To further expand its footprint, SGBH is looking to acquire more assets and is partnering with local companies to set up power transmission projects in the country. The latter strategy should help it to deal with issues related to site selection, land acquisition, local policies, local manufacturing, etc.

 

Another big Chinese player that recently entered the Brazilian market is Shanghai Electric Power Transmission and Distribution Engineering (SPTDE), a subsidiary of Shanghai Electric. In June 2017, SPTDE signed a preliminary agreement with Eletrosul Centrais Elétricas S.A. (Eletrosul), a subsidiary of Eletrobras, to transfer control of transmission system development for the Rio Grande do Sul project. Brazil’s energy regulator Agencia Nacional de Energia Eletrica (ANEEL) awarded the project to Eletrosul during an auction organised in November 2014. The total investment was budgeted at BRL3.27 billion to enable the construction of about 1,900 km of transmission lines and seven substations, as well as the expansion of 16 existing substations. As per Eletrobras, the next stage of the negotiations will establish the detailed conditions of the business, through a binding agreement, including issues related to the implementation and operation schedule. Shanghai Electric will establish an SPE to construct, operate and maintain future projects. Eletrosul is likely to hold up to a 25 per cent interest in the SPE. This agreement with Shanghai Electric is the result of the public call launched by Eletrosul in 2015 for the selection of companies interested in establishing a partnership for the implementation of the auctioned project.

 

Chinese companies are also keeping a close watch on the power transmission assets of the Spain-based firms Abengoa and Isolux Corsán. Abengoa has been one of the key private players in Brazil’s power transmission sector. In November 2015, the company filed for bankruptcy. In Brazil, the announcement has affected the development of about 6,100 km of new lines (including the high voltage direct current line associated with the Belo Monte hydropower project) and the operation of 6,800 km of existing transmission assets. ANEEL has been trying ever since to revoke the licences granted to Abengoa and offer the project, which it estimates will require additional spending of about BRL8 billion, to another investor. However, Abengoa has won court rulings allowing it to keep the assets and sell them as its Brazilian unit tries to emerge from bankruptcy protection.

 

In December 2016, the Brazilian government had to cancel transmission concessions belonging to Isolux Corsán due to concerns about project delays after the company announced its plans to restructure. Documents published by power sector regulator ANEEL show that the contracts for two projects auctioned to Isolux in 2015 were revoked. ANEEL is expected to penalise the company and outline a new bidding process for the projects in the coming weeks. The two projects involved 686 km of high-voltage power lines and seven substations in the northern states of Pará and Rondônia.

 

Colombian investment in Brazil 

Colombian electricity companies are also exploring investment avenues outside their country to expand their businesses. In March 2015, EEB entered the Brazilian market with the acquisition of a 51 per cent equity share each in four Brazilian power transmission companies. Under the deal, which cost EEB about USD170 billion, the company acquired Transenergía Renovável S.A., Transenergía São Paulo S.A., Goiás Transmissão S.A. and MGE Transmissão S.A. With this, the company acquired 1,094 km of power transmission network established at 500 kV, 345 kV, 230 kV and 138 kV, located in the states of Espírito Santo, Goias, Mato Grosso, Mato Grosso Do Sul, Minas Gerais and Sao Paulo. The remaining 49 per cent stake in the four Brazilian concessionaries is held by Furnas Central Electric SA (Furnas), a subsidiary of Eletrobras. In April 2015, EPM acquired a 22.14 per cent stake in Brazil-based local transmission utility Transmissora Aliança de Energía Eléctrica S.A. (TAESA) for BRL1.53 billion.

 

The Colombian state-owned ISA Group is already an established player in Brazil’s transmission sector. In December 2016, ISA further strengthened its position by acquiring a 41.6 per cent equity stake in the transmission developer Transmissora Aliança De Energia Elétrica SA (TAESA), which currently holds 33 transmission concessions comprising 11,000 km of high voltage power lines in Brazil. In a BRL1.06 billion deal, ISA has acquired 26 per cent of TAESA’s ordinary shares and 14.9 per cent of its capital stock from Brazilian equity firms Fundo de Investimento em Participações Coliseu (FIP Coliseu) and Fundo de Investimento em Ações Taurus (FIP Taurus).

 

Another acquisition deal that took place recently—in May 2017—in Brazil was for the concessionaire Interligação Elétrica Norte e Nordeste (IENNE). Under this, Companhia de Transmissão de Energia Elétrica Paulista (CTEEP)—a Brazil-based subsidiary of ISA—exercised its rights to acquire the entire equity interest of IENNE from Spain’s Isolux and local power company Construções e Participações S.A (Cymi Holding). Isolux holds a 50 per cent equity share and Cymi owns a 25 per cent equity share in IENNE. The deal cost CTEEP about BRL96.75 million, under which CTEEP purchased 164 million ordinary shares in IENNE from Isolux and 81.8 million ordinary shares from Rio de Janeiro-based Cymi Holding.

 

The conclusion of the transaction and the actual acquisition will be subject to certain conditions applicable to the respective purchase and sale agreement, such as the prior approval from Brazil’s energy regulator ANEEL. If approved, the transaction will result in the transfer of 100 per cent control of IENNE to CTEEP. IENNE was formed to participate in Auction No. 004/2007 hosted by ANEEL in March 2008. It won Lot A during the auction, under which it is responsible for the implementation, operation and maintenance of the 710-km, 500 kV Colinas–Ribeiro Gonçalves–São João do Piauí line along with other reinforcements.

 

Conclusion 

Significant investments are needed to ensure that the development of Brazil’s power transmission sector keeps pace with the rapidly expanding generation capacity. While there has been some good news in the last quarter with a small improvement in the economic growth of the country, the ongoing political crisis is a big hurdle for domestic electricity companies in raising funds for their projects. This provides ample opportunities to foreign players for exploring business expansion avenues in Brazil. The M&A trend that has been witnessed over the past two years is expected to continue in the short run or at least while Brazil continues to experience political instability.