Ecopetrol Falls on Bid for Stake in Colombian Power Firm ISA

(Bloomberg) -- Ecopetrol SA shares plunged after the state-owned oil company offered to purchase from the Colombian government a controlling stake in a $7.7 billion electricity transmission utility.

Ecopetrol, whose principal business is producing and shipping oil and gas, presented the Finance Ministry with a non-binding offer for the 51.4% of shares in Interconexion Electrica SA, known as ISA, according to a Wednesday regulatory filing.

Shares dropped as much as 6% in Bogota trading, the most in three months, before paring losses. ISA was down 4.6% as of 11:40 a.m. New York time.

Ecopetrol CEO Felipe Bayon said the deal, which now awaits government approval, would cost $3.5 billion to $4 billion and may take around six months to close. The stake is worth about $3.9 billion, based on a market capitalization of around $7.7 billion using Tuesday’s closing price, according to data compiled by Bloomberg.

The acquisition “does not make sense for an E&P company like Ecopetrol,” Citigroup Inc. analyst Andres Cardona wrote in a note to clients. The deal may raise questions about corporate governance, he wrote.

Medellin-based ISA operates electricity transmission and telecommunications lines, as well as highways, in several Latin American countries. A spokeswoman did not immediately respond to questions seeking comment.

Bayon said the addition of ISA would help the company’s transition to renewable energy production.

“It’s an absolutely transformational step for Ecopetrol on this path of energy transition and de-carbonization,” he said in comments to reporters.

The company would finance the purchase through newly issued equity and debt, cash on hand and potentially divestments of non-strategic assets. Since the government also holds a controlling stake in Ecopetrol, with 88.5% of shares, the sale could be executed through a direct contract and avoid a public tender offer process, which has proved time-consuming in previous government asset sales.

“The Republic of Colombia would remain as the ultimate beneficiary of ISA and maintains ultimate control of the shares,” Ecopetrol said in the filing. The government would also keep at least 80% of Ecopetrol’s shares.

As crude reserves slump in Colombia, Ecopetrol has increased its spending on renewable energy production while making investments in foreign markets in recent years. In 2019, it entered into a joint venture with Occidental Petroleum Corp. to develop a field in the Permian Basin in Texas. It has also bought stakes in fields in Brazil.

Equity Issuance

To finance the ISA acquisition, Ecopetrol may issue as much as $2.8 billion in equity before the government’s stake is diluted below the 80% mark, according to Daniel Guardiola, BTG Pactual’s lead oil and gas analyst.

Guardiola cut his recommendation to sell on the announcement, adding that “the strategic fit for Ecopetrol seems unclear, and it will clearly deteriorate its leverage, limiting its capacity to invest in its core business.”

President Ivan Duque’s government is pursuing asset sales among measures to plug its budget deficit as it attempts to rebound from its worst economic downturn on record. This month it started the process to hire an investment bank to help it sell seven regional electricity companies.

The ISA sale is subject to due diligence and completion of the equity offering, according to the filing. Grupo Energia Bogota SA, which is majority owned by the city of Bogota, has also said it is interested in acquiring the government’s ISA stake.

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