Eletrobras Jumps With $12 Billion Privatization Nearly Approved

Power utility Eletrobras jumped after Brazil’s senate passed a proposal to privatize the company, as the government’s plan to shrink the size of the state plows ahead.

Senators approved by 42-37 votes a bill that allows the government to raise an estimated 60 billion reais ($11.9 billion) through an offering of shares of the company. The original text was changed a few times to accommodate lawmaker demands and will return to the lower house for a second vote.

Common shares of Eletrobras rose as much as 10% to 47.99 reais ($9.50) in Sao Paulo Friday, an intraday record high, as traders priced in higher odds of the privatization taking place. Safra upgraded the stock to a buy-equivalent rating and Morgan Stanley said there’s room for significant gains even after the recent rally.

“Yesterday’s voting session was the one that really posed risk for the legislative approval,” analyst Miguel Rodrigues wrote in a report dated June 18. The privatization “will likely allow Eletrobras to sustain higher efficiency and investments.”

President Jair Bolsonaro is running against time to approve the bill before its June 22 expiration. His administration also intends to push for two constitutional reforms this year: one to overhaul the nation’s tax system and another to reduce costs with public workers. Both require the backing of two-thirds of lawmakers and need to pass by the end of the year, before they turn their attention to the 2022 presidential campaign.

Eletrobras Jumps With $12 Billion Privatization Nearly Approved

Support for government-sponsored reforms has become more uncertain in the senate, where Bolsonaro faces a probe into his handling of the pandemic.

Common shares of Eletrobras, formally known as Centrais Eletricas Brasileiras SA, are up 27% this year following a rally fueled by privatization hopes. According to estimates from Itau BBA, the stock could be worth 64 reais if the sale is approved, or about 29 reais if it fails.

Economy Minister Paulo Guedes and his team spent the past few days trying to convince lawmakers to approve the bill, saying the sale could reduce energy costs by up to 7.4%. Many remain unconvinced, fearing that electricity prices are actually going to increase after the sale. Bolsonaro also weighed in, saying that failing to privatize Eletrobras could bring “chaos to Brazil’s power system.”

One of the conditions imposed by senators is the construction of a series of thermoelectric plants by the company. After overnight negotiations, the government managed to remove language forcing such contracts to be signed before the privatization, which would make plans to sell shares in the beginning of 2022 unattainable. Yet the obligation to install thermoelectric plants stands, and the proposal even includes where they should be built.

Share Offering

The plan is to issue common shares of Eletrobras, diluting its stake to about 45%, while keeping a so-called golden share that gives it veto power in some decisions. State-controlled companies that are part of the Eletrobras system, including Itaipu and Eletronuclear power plants, will remain in government hands.

The economy ministry expects to raise 60 billion reais with the operation, with 25 billion reais going straight to the Treasury’s coffers. Part of the proceeds will be used to reduce consumers’ electricity bills and another portion will go to public development programs.

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