Utilities M&A: Chinese biding Brazilian plants and CEMIG thinking of acquiring in Latin America

Traditionally, investors  turn to utilities when times get tough. Botton line is: a lot of  M&A activity going on.

What is cheap today?  On  the report “The Playbook for Latam Equity Strategy” dated April 26th,  Deutsch Bank argues  that “.. the discount evaporates after adjusting for sector multiples. ” DB thinks that the only Latin sectors trading cheap relative to global peers are Latam financials, IT, and utilities on earnings compared to both the US and GEM.

On the other hand… Bradesco’s May 28th,  gives us a different perspective. “The electric utilities sector in Brazil features low leverage and low FX exposure, and due to its regulatory framework it is less affected by the effects of a potential economic downturn. High dividend yields also buffer investors from a major stock price correction.”

Electricity consumption in Brazil is on the rise and the energy utilities sector is seen as a good hedge in this moment of high volatility in the markets. Power consumption in Brazil grew by an impressive 9.6% year over year in 1Q10, according to the Energy Research Enterprise (EPE). Marcos Severine, analyst of Itau-Unibanco, argues that  “these strong growth data provide significant support” to their bullish estimate of a long-term power price of R$140/MWh.  In his report dated April 28th, he forecasts “the companies that benefit the most from rising long-term power prices are generation companies and integrated companies. ”

M&A risk  is high for CEMIG? CEMIG’s CEO, Djalma Morais explained that the company’s bid for Plena was just R$200mn below that of Chinese State Grid. The fact is that this number would imply an EV/EBITDA multiple of 11.6x,  considered “quite expensive” by Wladimir Pinto, Bradesco Corretora’s energy analyst. He previously said in his update report that M&A risk had diminished due to increased competition and a lack of assets that can be acquired, the difference between the two bids was smaller than expected.

Acquisition in Latin America. CEMIG  is looking for assets in Latin America in the event it is unsuccessful in a Brazilian M&A.  This move was not very well recieved by some analysts. The problem is that  it could  increase CEMIG’s risk, as  the company would be exposed to a new regulation, FX risk and other countries’ risk.

Cemig’s new guidance surprised some analysts present on the company’s annual meeting hosted this week. CEMIG ‘s guidance was below from 2009. The possibility of the company acquiring assets outside Brazil is percieved as a risk by ITAU-UNIBANCO. and/or another expensive asset in Brazil. On the positive side, the company confirmed its commitment to a dividend payout of 50%.

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About Hildete Vodopives

Hildete de Moraes Vodopives is founder of Brazil Global and of the Harvard Strategists Bureau. She is a member of the Brazilian Investment Analysts Association (APIMEC-Rio) where she served as Corporate Relations Director and later, on the board. Hildete advises companies doing business in Brazil. She lives between Paris and Rio and is a member of the Harvard Club of Paris and of the Mercosur Women’s Forum.
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