Eletrobras: market criticizes interference attempt – 05/07/2023 – Market

The attempt by the Luiz Inácio Lula da Silva government to increase power at Eletrobras raises legal uncertainty in the market and may hinder the privatization of state-owned electricity and sanitation companies, in addition to increasing the volatility of shares of mixed capital companies on the Stock Exchange , in the evaluation of market analysts and fund managers.

This Friday (5), President Luiz Inácio Lula da Silva (PT) asked the STF (Federal Supreme Court) to declare part of the Eletrobras privatization law unconstitutional, so that the Union has a vote proportional to its shareholding in the company. .

The request, made by the AGU (Attorney General of the Union), through an ADI (Direct Action of Unconstitutionality), tries to overturn the section of the law that prohibits shareholders from casting votes in excess of 10% of the number of shares. The AGU lawsuit states that the Union retained 43% of the company’s common shares.

Economist and partner at Sergio Bermudes Advogados Elena Landau recalls that, during the debate on the privatization of the company, there was a fear that foreign groups, especially Chinese, would acquire control. The voting limitation was thought of in this context and included in the privatization law and in the company’s bylaws to avoid this concentration of power.

Landau, who commanded the privatization program of the FHC government and is a specialist in corporate law and capital markets, opposed, at the time, the privatization model of Eletrobras. He defended other formats. But he says questioning the government makes no economic or legal sense.

“This limitation happens in all corporations, and it is necessary to have voting limitations to prevent an aggregation of interests — to prevent a group, behind the majority, from making agreements that do not actually represent the majority. This is normal” , she says.

“Since the first threat [do governo, de alterar as regras da Eletrobras], I talked to all kinds of lawyers to discuss the issue. Everyone thinks it doesn’t work. It will only serve to further devalue the company.”

A fund manager with a relevant stake in Eletrobras. who preferred not to be identified, agrees with this analysis. He says he sees little chance of the government’s attempt to increase its power in the company succeeding.

This manager mentions that Embraer and B3 itself are among other important companies on the Exchange that also have the same lock to limit shareholder voting. The government’s going to court could trigger a series of questions, increasing volatility on the stock exchange and worsening the business environment in the country, he says.

The reading is that invested would also have the side effect of deepening the perception of regulatory risk in Brazil.

According to André Gordon, founding partner of the manager GTI Administração de Recursos, the government’s initiative in the case of Eletrobras may hinder the evolution of privatization processes of state-owned sanitation and energy companies such as Sabesp (Companhia de Saneamento Basico do Estado de São Paulo), Cemig (Minas Gerais Energy Company) and Copel (Paranaense Energy Company).

Both the government of Tarcísio de Freitas (Republicans), in São Paulo, as well as that of Ratinho Júnior (PSD), in Paraná, and that of Romeu Zema (Novo), in Minas Gerais, have already expressed their intention to privatize sanitation companies of their respective states.

“Everyone will want to wait and see what the jurisprudence will be [sobre o caso da Eletrobras]”, says the GTI manager, adding that the thousands of investors who bought Eletrobras shares in the privatization process did so taking into account a scenario in which the company would continue with dispersed capital, without submitting to policies imposed by the government.

Analyst at Ativa Investimentos, Ilan Arbetman has a similar view. “The shape [pela qual o governo busca para aumentar a influência na Eletrobras] it is not positive for the company, for the market and for any investor that wants to invest in Brazil. This brings legal uncertainty,” he says.

The analyst adds that discussions involving possible privatization of sanitation companies in São Paulo and Paraná could replicate the model adopted in the Eletrobras process. The government’s measure, therefore, tends to negatively affect conversations regarding the sale of these state-owned companies, says Arbetman.

The Ativa analyst also says that the government could seek other ways to increase its influence in Eletrobras, such as claiming the unconstitutionality of the privatization in the STF, proposing the change of shareholders’ votes at a meeting or even paying the premium of 200% on the maximum price of the shares in the last 500 trading sessions to buy back the shares that were sold in the process of selling the electric company.

The way chosen may have been considered the easiest way for the government to be successful in the undertaking, but it is bad for investors’ perception of the Brazilian market in general, says Arbetman.

Founding partner of the investment analysis house Nord Research, Bruce Barbosa says that the government’s action regarding Eletrobras should not bring impacts to the stocks of other companies in the electricity sector on the Stock Exchange, but could increase the volatility for the shares of the state-owned companies, the increased risk of interference.

“It’s terrible for governance and for Brazil”, says Barbosa. He says he hopes that Congress will block the measure, and makes reference to the government’s recent defeat in the Chamber —at the beginning of the month, deputies overturned changes made by the federal government in the Sanitation Framework. “The entire Brazilian market is suffering from this government’s decisions. That’s why it’s so cheap.”

Eletrobras common shares accumulate devaluation of about 19.4% in 2023, until May 5, according to Bloomberg data. The Ibovespa retreated 4.2% in the same period. The government’s action in the STF “will certainly continue to weigh on the paper throughout the process”, says Arbetman, from Ativa.

As the ADI itself states that prevention should occur (preference for the issue to be analyzed by a judge who already deals with the proposed issue), the government’s questioning tends to be forwarded to Minister Kassio Nunes Marques, rapporteur of two other actions that question privatization from Eletrobras, one from Podemos and another from PT.

Nunes was nominated by Jair Bolsonaro (PL) and has positioned himself in favor of the theses defended by the previous government, in favor of privatization. Other STF ministers also support privatizations. However, some specialists in the legal field point out that there may be surprises, since the Ministers of the Court have revised their positions.

A recent example is the change in the vote of Minister Gilmar Mendes. He reviewed his previous position to follow Minister Luís Roberto Barroso’s vote and consider the institution, by agreement or collective agreement, of assistance contributions to unions to be constitutional.

Even though it assesses that reversal of privatization is remote, Eletrobras itself has already communicated the risk to the regulator of the US capital market.

This Saturday, President Lula spoke again about Eletrobras and stated that he intends to file a lawsuit questioning the privatization of the company. The Chief Executive criticized limits created in the privatization of the company that make it difficult for it to be renationalized and questioned the remuneration of directors and directors of Eletrobras.

“The directors increased their salaries from BRL 60,000 a month to more than BRL 360,000 a month, and a counselor to organize a meeting earns more than BRL 200,000. It is not possible in a country where 33 million people spend form us to live in a situation like this”, said the president, in a press conference this Saturday (6), in London, after the coronation of King Charles III.

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Privatization of Eletrobras began in the 1990s and suffered several setbacks

FHC (1995-2002): During the FHC administration, an attempt was made to sell Eletrobras to the private sector. The measure was resisted and did not materialize, but during his term, the president privatized almost all distributors, including Escelsa, a distributor in Espírito Santo, Light, in Rio de Janeiro, and Gerasul, which operated in the south. from the country

Lula (2003-2010): In addition to putting the plan to privatize the state-owned company in the drawer, the PT government put a brake on sales by distributors, but continued with auctions for transmission and power generation. Among the initiatives that marked that moment are the beginning of the wind energy auctions, in 2009, and the Belo Monte Power Plant, in 2010.

Dilma (2011-2016): In six years in power, Dilma followed the booklet adopted by Lula. Auctions were held for transmission lines and hydroelectric plants — such as Três Irmãos, in São Paulo

Temer (2016-2018): Two months after assuming the Presidency, Temer resumes the privatizations and cleans up one of the biggest liabilities of Eletrobras, selling loss-making state distributors that were under the umbrella of Eletrobras. There were six in all

Bolsonaro (2019-2022): In addition to bringing Eletrobras’ privatization plans to the fore again, Bolsonaro followed in Temer’s footsteps in the auctions of distributors, such as CEB (Companhia Energética de Brasília) and CEA (Companhia de Eletricidade do Amapá).

Lula (2023-): Since the election campaign in 2022, Lula has been talking about reversing the privatization of Eletrobras and interrupting other state sales processes in the country. In the last week, the government went to the STF to increase the Union’s voting power in the energy company, and the president has said in speeches that he must act against the loss of control of the company