Brazilian energy sell-off cancelled

São Paulo’s state government yesterday cancelled the privatisation of CESP, the Brazilian energy group, because of a lack of interest from potential bidders.

The deal would have raised a minimum of $R6.6bn ($3.8bn, €2.4bn, £1.9bn), for a company which is Brazil’s third-largest power generator and accounts for about 10 per cent of the nation’s electricity.

Uncertainty over regulatory risks scuppered the deal at the last minute after -several companies had entered discussions about forming a consortium to bid for the energy company. CESP’s shares tumbled yesterday, falling by 16 per cent by midday on the Bovespa exchange.

In cancelling the privatisation, José Serra, governor of São Paulo state, which part-owns CESP, said the state was not prepared to lower the price for the asset and suggested would-be bidders might have been unable to raise the necessary finance because of tightness in credit markets.

In a broader sense, the timing is unfortunate for Brazil which, after months of financial sturdiness, has entered more turbulent waters in the past couple of weeks.

Last week’s 8 per cent-plus fall in commodity prices triggered declines in the local stock market and brought the global financial crisis closer to the country than at any time since the problems of the US subprime mortgage market
emerged last year.

This week, the central bank issued new economic forecasts, indicating a gloomier scenario for the country’s external accounts. Partly because of growing imports, the current account deficit is expected to widen to $12bn (€7.7bn, £6bn) compared with an earlier projection of $3.5bn.

Fewer portfolio flows are also expected to arrive, after the suspension this year of a number of initial public offering plans by Brazilian companies.

The problems at CESP are mainly a result of regulatory and legal uncertainty. Licences to run the Jupiá e Ilha Solteira generation plants, which account for 67 per cent of the output of CESP, both run out in 2015.

The licences have already been renewed once and Brazilian law stipulates that they cannot be renewed a second time. That means a change in the law will be necessary to ensure CESP holds on to these important assets.

All of this is complicated by political factors ahead of municipal elections to be held in October.Mr Serra has been lobbying for the federal law on licences to be changed to allow a second renewal to secure the future of CESP and thereby maximise the state’s revenues from the sale.

The governor, however, is a leader of the opposition PSDB party and Luiz Inácio Lula da Silva, Brazil’s president, has been reluctant to co-operate.

Bankers said the group that might have bid for CESP included CPFL, Brazil’s largest private energy company; Tractebel Energia, whose major shareholder is Suez of France; and Brazil’s NeoEnergia.

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