May 20, 2022

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Eletrobras (ELET3): The TCU's decision is a setback for the government and hinders, but does not stop, privatization, analysts say.  stock closing

Eletrobras (ELET3): The TCU’s decision is a setback for the government and hinders, but does not stop, privatization, analysts say. stock closing

Vote on the second phase of the Eletrobras capitalization process (ELET3;ELET6), which dealt with company modeling and the new company model and was under processing by the State Audit Bureau in a session held on April 20, It was suspended for 20 days. As a result, the court is likely to resume voting only on May 11, delaying the proposed share offer, as filings will have to be submitted with results for the first quarter of 2022 (1Q22), which are scheduled for May 16.

The plan of the company and the government was to make the bid in May to avoid further volatility near the October elections.

This delay could potentially move the proposed capitalization proposal into the second half of 2022, closer to the October elections, which could lead to additional volatility in the markets.

As expected, Minister Vital de Rigo demanded a review of the process, which sparked a long debate among ministers about the deadline for getting back on the agenda.

Initially, Vital said he would need 60 days to analyze the case better. However, after other ministers suggested shortening the return period to seven days, he ended up accepting the 20-day regiment period.

With this, the process will return to the plenary at a time when the ideal timetable for the government to implement the capitalization offer will be unfeasible.

In order for the show to roll out on May 13, TCU will have to give its approval for privatization by April 27. According to a source interviewed by Reuters, the government is not working with the hypothesis that Vital do Rêgo is restarting the process until then. Another source said he believed that despite the delay, the privatization would take place at the end of this year.

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The CEO was arguing that the ideal window for action was in the first semester, when investors tended to pull out as elections approached, either because of increased uncertainty, or because of internal constraints on investment funds.

“We remind you that despite the lack of vision for the success of the operation, we recognize that a successful capitalization scenario can generate significant value for Eletrobras,” analysts at Goldman Sachs assess.

Goldman analysts remain with ELET3 and ELET6 stocks with a 12-month target price of R$46 (9% upside from Wednesday’s close) and R$51 (up 21%), as they still see advantages in the base scenario their own. Major risks include any results from forced borrowing that exceeds current book value, worse-than-expected hydrology, long-term energy prices below their estimate of R$170 per megawatt-hour (MWh), and higher-than-expected general and administrative costs. “Finally, we note that the company has a very stable and low-risk cash flow over the next nine years,” their assessment said.

However, the capitalization scenario has a higher potential for the assets, with an expected R$65 to R$67.60 per ELET3 share (or upside potential between 54% and 60%) and R$71.80 and R$74.60 for ELET6 (or a rise between 70% and 76.5%), opening a much higher value.

More difficulties, but privatization is still possible

A manager interviewed by InfoMoney who is already following the process closely explained that the base scenario was a twenty-day request to be shown by TCU, What can postpone the show to mid-August. According to him, the postponement will not make the process useless, but it will make the offer more ambiguous, depending on market conditions during the month and even taking into account the approaching elections.

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Levante Ideias de Investimentos points out that, behind the scenes at the Ministry of Economy, it is understood that the realization of privatization is within its power, but there is still hope to sell the company. There are no legal impediments to privatizing Eletrobras in the June-August window, but the proximity of
Elections and the calendar in the northern hemisphere are two factors that could exhaust the demand for the process.

It is worth noting that Eletrobras shares closed with a strong rise of 3.94% for ELET3 and 4.60% for ELET6 in last Wednesday’s trading session, but the TCU session is not over yet. It highlights “encouraging the markets by forming a virtual majority to sell the state-owned company, yet they could not foresee that it would take twenty days to solicit opinions – not just seven, as the CEO would like”, Levante.

In this sense, and a reversal of the negative day for the market in general, stocks experienced a bearish session on Friday. ELET3 assets closed down 4.95%, at R$40.11, while ELET6 was down 3.97% at R$40.59.

“With regard to the privatization itself, the delay in the analysis in the TCU can be seen as a defeat for the government, which will now have to deal with the real possibility that there will not be enough appetite in the market to do the stock offering,” the company’s valuation house researches.

Guedes and Bento Albuquerque see privatization in 2022

However, government ministers continue to express optimism about the process. Yesterday, in Washington, Paulo Guedes, the Minister of Economy, said he believed that “The privatization of Eletrobras will take place this year, very soon”.

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He indicated that he “wanted to believe” that the Federal Audit Bureau is in the final stage of analyzing the company’s privatization process. “I am very confident that it will work,” he said.

The Minister emphasized that the capitalization of Eletrobras is an important step towards energy security in Brazil. According to him, the company needs to invest R$15 billion annually to maintain its market share, but it can only invest R$3 billion annually.

Along the same lines, the Minister of Mines and Energy, Pinto Albuquerque, said on Friday that the government continues to plan for Eletrobras investment this year.

I think the TCU’s decision on Eletrobras was a progression of the process, because the rapporteur submitted his vote and the other ministers discussed it. The Eletrobras investment schedule was until the end of April, but this 20-day delay will result in an adjustment,” Albuquerque said, in a virtual press conference.

The minister emphasized that with the date change, the company’s stock offering modeling will also have to take into account the results of Eletrobras in the first quarter of this year. “Through the work of TCU, we will offer Eletrobras shares in the first half of the year or at the beginning of the second half, in July,” the minister added.

(with Reuters and Estadão content)

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