Privatized Eletrobras is value at the least BRL 142.5 billion

A more optimistic forecast sees the share at BRL 71.00, equivalent to a 40% increase over the current price on the stock exchange

After privatization, investment analysts are resuming coverage of the shares of Eletrobras (ELET3/ELET6). The company, which was valued at almost R$100 billion, in the mega-offer of R$34 billion, should be worth at least 25% more. This is the most conservative view among the top five investment banks: Bank of America (BofA), BTG Pactual (from the same control group as EXAM), Credit Suisse, Itaú BBA and JPMorgan.

Experts in the energy sector estimate that the shares should be traded between R$62 and R$71. At the bottom of the calculation, the former state-owned company would be worth R$142.5 billion and, at the top, R$163.5 billion — taking class B preferred shares (ELET6) as the basis of value for all capital stock. In the offer that marked the diversification of Eletrobras’ capital, the shares were sold for R$ 42. Currently, the shares are traded for around R$ 50, with the company valued at R$ 113 billion.

More than resuming coverage, the analysts of the five houses chose the company’s shares as their favorite in the entire utilities sector, which encompasses essential services such as energy, water and natural gas. Eletrobras was already well-liked in the market considering its size: the company is responsible for 28% of the installed generation capacity in Brazil and owns almost half of the transmission lines in the country. Another old news is the attractive valuation, added to the dividend payment that makes the company one of the favorites in the sector.

What changes, then, with privatization? Analysts project that the company may enter a new phase for its business, even more valuable, supported by four pillars: change in management, cost cutting, re-pricing of the electricity portfolio and debt renegotiation.

new management

The first step begins this Friday, 5th, with the election of the new board of directors – in a shareholders’ meeting that has just begun, scheduled for 1:30 pm. The board will be responsible for choosing the new CEO and defining the company’s strategy until 2025. There is great expectation that Wilson Ferreira return to command of Eletrobras, after leaving the position in January amid pressure against privatization.

The slate nominated for the new board has five new names: Ivan Monteiro, former president of Petrobras; Carlos Augusto Leone Piani, former president of Equatorial Energia; Octavio Cortes Pereira Lopes, former advisor to Light and TokStock; management specialist Vicente Falconi and lawyer Marcelo Gasparino, who is also an advisor to Vale and Petrobras. In addition, Daniel Alves Ferreira, Felipe Villela Dias and Marcelo de Siqueira Freitas were nominated on the ticket, as reappointment. Pedro Batista was nominated by preferred shareholders for a separate vote.

From this list, two names have already become impossible to be elected: Octavio Lopes, for the nomination for the presidency of Light, and Carlos Augusto Piani, who would have renegotiated his permanence on the Equatorial board – both, therefore, would be in a situation of conflict. If it is confirmed that in fact these names do not remain, the board loses the main names that understand the sector. Anyway, despite several well-known names for the composition of the collegiate, the greatest optimism is around the expected return of Wilson Ferreira.

He was responsible for a successful process of turnaround in the then state-owned company that prepared the ground for the privatization of the company with the structuring of an internal governance regarding the reorganization involving the various subsidiaries. In BTG’s calculations, the positive influence of Ferreira’s management can be found in the increase in the Ebitda margin, which rose from 30% in 2016, when he took over, to 40% in 2021.

At Itaú BBA, analysts expect the executive to be announced as CEO today, or as early as next week, unlocking value for the shares. “The company is no longer limited by being a state-owned company, and management will now have much more flexibility to implement the changes that could make it one of the best utility companies in the world,” they said in a report.

Cleaning the house

One of the changes expected from the new management is a significant cost cut — common in the transition from a state-owned company to a privatized one. JPMorgan highlights the deconsolidation of Eletronuclear as a relevant cut, with a reduction of 1,600 employees. Calculations estimate that the process could reduce selling, general and administrative expenses by 40% from 2022 levels.

“Eletrobras must work with consultants to reduce costs and optimize existing operations, going beyond what was possible to improve as a state-owned company. The magnitude and speed of cost cutting will be monitored by the market and could be an important source of upside [potencial de valorização] or downside [potencial de queda]”, says the bank report.

Increase in spot earnings

Analysts’ attention is also focused on the potential for re-pricing the electricity portfolio. After privatization, 22 of the company’s hydroelectric plants will leave the current quota regime, which only pays for operation and maintenance and in which the hydrological risk is allocated to the consumer. The mills will switch to the independent production regime, which gives the company more marketing freedom.

“By joining [ao regime de cotas], Eletrobras agreed to sell energy to Brazil’s distribution companies at much lower prices. Now, as part of the privatization process, the end of the quota regime will allow Eletrobras to freely sell this energy under much better conditions”, argue the BTG analysts.

debt renegotiation

Eletrobras has a total of R$34 billion in provisions for contingencies, including R$26 billion in compulsory loans. Additionally, the total liabilities of pension funds reached R$ 5.7 billion.

Credit Suisse analysts point out that, as a state-owned company, Eletrobras could not negotiate agreements or seek different legal opinions to help reduce the total amounts in dispute. With the privatized company, the situation may be different.

“We remind you that CESP [agora Auren Energia] managed to reduce its total liabilities above 40% [com a privatização]. Consequently, we decided to include a haircut [desconto na renegociação da dívida] of 20% on recorded provisions and allow the company to pay the amounts due in installments [como um reconhecimento de dívida]. We also believe that Eletrobras will be able to benefit from the tax credits resulting from the losses recorded with these provisions”, defend the analysts.

BofA adds that, in past privatizations, the potential for debt reduction was between 20% and 30% of the original value. “It is a particularly likely scenario for Eletrobras as many of these liabilities have financial investors as counterparties, who have acquired disputed receivables at a discount from other parties,” the report states.