Deals of the YEar awards
The privatization via capital increase of Eletrobras, Brazil’s largest power utility company, was a deal that had it all.
It was big, at R$34 billion. It was complex, as it required the approval of new laws and the involvement of government audit bodies, state development bank BNDES, 12 commercial banks and a plethora of law firms. It was rare, as it was among the only significant equity deals to successfully close in the year. And it was dramatic, as the sale of a large capital stake owned by the Brazilian state met with fierce opposition from politicians of different stripes – including those who ended up victorious in the 2022 general elections.
Nobody really wanted to see the process dragged into 2023. So, once the federal government implemented some required legislative changes via executive order in June 2021, management started to work full tilt to make the deal happen.
“In 2018, it took Eletrobras two years to finish the sale of six distribution subsidiaries. The capitalization, which was a much bigger and much more complex deal, was completed in less than one year,” says Elvira Cavalcanti Presta, the CFO of Eletrobras.
“Capitalization” is the word the company uses to describe a process that, to its detractors, was tantamount to fire-selling a valuable strategic asset. To reduce resistance, management decided to dilute the participation of the state via an equity follow-on deal, rather than simply sell government shares directly to investors. The decision entailed considerable complexity that required many months of negotiations with TCU, the federal audit office, and thorough financial modeling work by BNDES.
Numerous requirements, above and beyond those of a typical follow-on, had to be met. The federal government’s stake would have to be diluted from 72% to no more than 45%. Investors were informed that if there were not enough guarantees that such a threshold would be met, the offer would be cancelled.
The company had to split two of its units, the one that manages the Brazilian side of the Itaipu hydroelectric complex and nuclear energy company Eletronuclear, into separate independent companies as they could be part of the deal. R$6 billion in investment vehicles had to be set up with money from workers’ fund FGTS to allow small investors to have a taste of the cake. (Almost 350,000 individuals ended up buying shares). Furthermore, the price needed to be high enough to guarantee that the offer would fetch a minimum of R$22.1 billion for the government.
“The offer had a minimum price, and the market was not told what it was. We ourselves were not informed until the pricing day,” Presta recalls. “The market was very cautious about the price, as in theory it already had a market value, so there were doubts about the process. But BNDES has a strong modeling experience and we trusted that the minimum price would be a reasonable one.”
At the end, demand for the deal was strong and Eletrobras raised R$34 billion, which went straight into the Treasury coffers. The model chosen included a golden share owned by the government that gives it the right to prevent any attempts by other shareholders to increase voting rights to more than 10% of the capital. The goal was to make sure that Eletrobras will not have a controlling shareholder in the future.
“The way it was structured, the process ended up attracting long- term institutional investors, and not other energy companies,” she says.
In the course of 2021 and early 2022, weekly meetings were organized between Eletrobras, TCU, BNDES, bankers and lawyers to align the myriad aspects of the deal. In February, minority shareholders approved the offer after a nine-hour meeting. TCU gave its final blessing on May 18, and the offer, led by BTG Pactual, was launched on May 27. Pricing was achieved on June 9, and the deal was closed in Brazil five days afterwards.
Presta estimates she participated in some 300 meetings with investors between February and May, and interactions between Eletrobras and the 12 banks with the market numbered over 800. It was the largest follow-on deal of the world in 2022, and the second largest ever in Brazil, according to Bank of America.
“In the end, we were able to make it work in a very challenging year,” says Presta. LF
Global Coordinators: BofA; BTG Pactual; Goldman Sachs; Itaú BBA; XP Investimentos
Joint Bookrunners: Citi; Banco Safra; BofA; Bradesco BBI; BTG Pactual;
Caixa Econômica Federal; Credit Suisse; Itaú BBA; Morgan Stanley; XP Investimentos;
J. P. Morgan
Financial Advisor: Laplace Finanças
Issuer's Legal Advisors: Clifford Chance; Pinheiro Guimarães
Underwriters' Legal Advisors: Mattos Filho; White & Case
Selling Shareholder's Legal Advisors: Lefosse; Tauil & Chequer | Mayer Brown;
Shearman & Sterling
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