It took less than 10 days to decide to privatize Latin America’s largest power company.
Fortunately for the Brazilian government, with its fiscal accounts in dire straits, it already had someone enthusiastic for the job. When the Energy Ministry came to him with the proposal, Eletrobras Chief Executive Officer Wilson Ferreira Jr. jumped on board to take charge.
“The decision to privatize the company is meant to transform Eletrobras into a corporation like Brazil’s Embraer or Vale,” Ferreira said by message on Tuesday, a day after the announcement. “It will enable Eletrobras to be much more competitive when compared to its global peers.”
Privatization wasn’t the first option, according to a person close to the discussions. The government’s initial idea was to squeeze value out of Eletrobras by selling some of its power plant concessions to generate cash for its own depleted coffers, the person said, asking not to be identified because the information isn’t public. It wasn’t a good plan for the company, though, so the Energy Ministry proposed privatizing it instead. It was a go.
It was likely a given that Ferreira would be enthralled by the idea; he’s credited with turning CPFL Energia SA into the biggest private power company in Brazil, and is known for his penchant for privatizing assets and ability to boost profitability. He was the government’s "market choice" to replace a political appointee in June 2016.
Ferreira, 58, will now preside over the latest, and boldest, move for a company undergoing a massive restructuring in the face of a sputtering economy suffering from a shortage of hope. Investors thus far appear very happy about the proposal, despite the potential hurdles ahead: shares in New York and Sao Paulo rose 49 percent, the most in at least two decades. Futures for the Ibovespa benchmark index extended gains on continued enthusiasm for the plan.
Already Working On It
The executive had already been forging ahead, glossing over the roiling economic and political instability that has shaken investor confidence, atrophied asset values and led to higher debts. In addition to privatizing the company — which could raise as much as 20 billion reais ($6.3 billion) — he’s selling distribution subsidiaries and wind and power transmission assets, as well as slashing the workforce.
“Every week in Brazil we have something new and surprising, so if we stop to consider every single event, we’ll just be paralyzed," said Ferreira in an interview at the company’s Rio de Janeiro headquarters last week, before the privatization was announced. "The decision we took was to forget about all this, with the purpose of turning on the light at the end of the tunnel.”
His goal is to recover debt levels and resume investing in big energy projects, including with neighboring countries. Ideally, much of the work will be done by the end of the year, the CEO said.
Eletrobras has the title of top raiser of debt on Fitch Ratings’ Latin America ranking, according to an Aug. 16 report. In June, net debt reached 23.4 billion reais ($7.3 billion). Ferreira’s aiming to trim its debt-to-Ebitda ratio to 4 times in the next five months, from 7.8 times when he took over the job.
The CEO has already sold the first of seven distribution subsidiaries earlier this year, for about 2.2 billion reais. The rest should be gone by the end of 2017, along with stakes in 74 special purpose companies that manage wind farms and transmission lines. Eletrobras should pocket about 5 billion reais from those sales, he said.
“It doesn’t make sense to invest in small wind farms,” he said. “We are more useful when dealing with big power projects, such as nuclear, hydroelectricity and large transmission lines.”
The subsidiary sales will also reduce the workforce, alongside a voluntary redundancy plan, by 47 percent from 23,000 today. The estimated cost savings is 1.8 billion reais a year.
Still, the utility’s restructuring plan as a whole — which is on track even with the privatization — faces resistance, Ferreira said. Analysts also say political pushback is one of the potential hurdles to the privatization.
The company has "historically operated under the political influence of various political figures who may not be so enthusiastic" about privatization, Itau BBA analysts led by Pedro Manfredini wrote in a note, which also cited possible opposition by labor unions.
“The things that we are doing depend on the government: we have the politicians and people in distribution companies who don’t want privatization," he said. "We’re fighting."