Market News

 January 12, 2012
German giant E.ON, MPX in $34-billion Brazil power deal

 Giant German utility E.ON AG said on Wednesday that it will team with Brazilian billionaire Eike Batista to build the largest privately held network of power plants in Brazil, as it bets on emerging markets amid stagnant growth in Europe.

Dusseldorf-based E.ON and Batista-controlled MPX Energia said they could jointly build up to 20 gigawatts of generation capacity in Brazil and Chile, tapping coal, natural gas and renewable resources such as wind and solar power.
A building spree that size, which Mr. Batista said could cost $34-billion (U.S.), would equal a fifth of existing generation capacity in Brazil, an emerging economic power and the world's No. 6 electricity consumer.

Reuters was first to report a pending deal between E.ON and Rio de Janeiro-based MPX on Tuesday.

E.ON would pay 850 million reais ($471-million) for a 10-per-cent stake in MPX, executives from both companies told reporters on a conference call on Wednesday. The transaction is expected to close in the second quarter.

In a 50-50 joint venture, the companies said they plan to build the 11 gigawatts of coal and gas-fired power plants for which MPX already holds licenses in Brazil and Chile, a program that could cost $22-billion.

Eventually, jointly operated plants in Brazil and Chile may total 20 gigawatts of power, said Mr. Batista, Brazil's richest man.

He offered no precise timeline. MPX's previous plans called for it to add one gigawatt of capacity per year, or enough to power roughly 850,000 U.S. households based on U.S. Department of Energy figures.

With the joint venture, the pace of expansion may be "recalibrated," Mr. Batista told reporters, since E.ON could help to pay for the program and would bring vast engineering expertise.

"For us it was the perfect marriage," said Mr. Batista, a 55-year-old serial deal maker who says he wants to become the world's richest man.

Mr. Batista's growing industrial reach in Brazil ranges from power plants, to oil and gas, mining and shipping, but most of his planned ventures are in an early, capital-intensive stage of development.

The deal would give E.ON, which has struggled to stay profitable in Europe, access to Latin America's biggest economy, where electricity demand is growing almost 5 per cent a year -- or 10 times faster than in Germany.

German utilities, including E.ON and RWE AG, have been hit by Chancellor Angela Merkel's decision to scrap nuclear power production permanently after last year's earthquake and radiation leaks from the Fukushima nuclear plant in Japan.

While Brazil gets more than three-quarters of its electricity from hydroelectric dams, MPX and E.ON plan projects dominated by fossil fuels.

Thermal power plants provide a market for the coal and natural gas that Mr. Batista's EBX Group plans to produce and would supply power to the ports, shipyards and industrial parks he is building.

E.ON chief executive officer Johannes Teyssen told reporters that the joint venture with MPX is a good match since MPX already holds major project licenses. New plants in Brazil have struggled to meet the country's surging demand.

"MPX is more than a great investment opportunity," Mr. Teyssen said. In a statement, E.ON said the partnership "will enable us to create significant value in thermal and renewable power generation in Brazil."

The companies expect project finance from Brazil's state-owned development bank BNDES, which offers low-interest loans for infrastructure, will be available to fund up to 75 per cent of construction costs, reducing capital costs.

E.ON's first foray into Brazil comes just weeks after the company lost to Chinese utility Three Gorges in a bidding battle for a stake in Portugal's EDP, which has assets in Brazil. E.ON last year identified Brazil, India and Turkey as target markets.

Foreign utilities including GDF Suez, Duke Energy Corp., China's State Grid Corp. and AES Corp. already operate in Brazil.

"Brazil needs investment in energy and E.ON needs to expand in a place where there is growth," said Edmilson Moutinho dos Santos, an energy policy expert at the University of São Paulo.

Investors have speculated for months about a pending deal between MPX and a foreign utility, helping boost MPX shares. In the past 12 months MPX rose 78 per cent, making it the best-performing stock on the IBRX Brazil Index of the country's 100 most-traded stocks.

The E.ON purchase of a block of new stock equal to 10 per cent of MPX would dilute the ownership of existing shareholders unless they used their so-called tag-along rights to buy new stock. MPX said the E.ON purchase and tag-along sales would raise one billion reais for the company.

MPX also said it plans to spin off its potentially rich Colombian coal-mining unit, called CCX, which is expected to be listed separately on the same São Paulo exchange as MPX later this year.

Some analysts said E.ON's profitability in Latin America could be limited by heavy electricity regulation in the region.

"This is not a game changer. The business for new production capacities in Brazil is heavily regulated, which means limited upside or downside," said Peter Wirtz, an analyst at WestLB.

But others see less risk, in part because the country's electricity legislation was overhauled eight years ago. The changes were implemented by then energy minister Dilma Rousseff, in part to secure new foreign and domestic investment. Ms. Rousseff is now Brazil's President.

"That's a good sign for investors who are concerned about regulatory consistency," said Moutinho dos Santos, the energy policy professor.

Power demand in developing economies is surging. According to the United Nations' International Atomic Energy Agency, total electricity consumption in emerging markets should more than triple by 2030, rising to 43 per cent of world demand from 27 per cent now.

E.ON is expected to report a first-ever annual loss for 2011.