Understand how Cemig could end up in the hands of the Union – 11/24/2023 – Market

A file is circulating behind the scenes at the Legislative Assembly of Minas Gerais that points out two ways for the Minas Gerais government to complete the federalization of Cemig: through BNDES or through Eletrobras, which would be a way for the Union to increase control of the company.

The paths were proposed by Luiz Humberto Fernandes, vice-president of Cemig between 2018 and 2019, at the request of state deputy Professor Cleiton (PV).

This Wednesday (22), the governor of Minas Gerais, Romeu Zema (Novo), said he agreed to transfer state assets, such as Cemig and Codemig, to reduce the debt of R$161 billion with the Union.

According to Fernandes’ proposal, the easiest way would be through the purchase of shares by BNDES (National Bank for Economic and Social Development).

In this case, after the federal and state governments reach a consensus on the company’s market value, the shares would be transferred to the bank, which would later transfer the value to the federal Treasury.

Therefore, the first step after an agreement between the Lula and Zema governments would be the assessment of Cemig’s market value by an independent audit.

Fernandes’ simulation was carried out with the Minas Gerais company worth R$31.43 billion on the stock exchange. But the participation of the state government of MG is 22% of the total capital, which results in approximately R$7 billion.

According to Fernandes, in an independent assessment, Cemig’s value could reach R$40.86 billion. “There would be a 30% premium, which is the average increase in state-owned companies when they are evaluated for privatization”, explains the proposal. This would increase the state’s participation in Cemig to approximately R$9 billion — 5.6% of the state’s total debt with the Union.

This path would exclude the need for the Assembly to amend the state Constitution to allow the privatization of Cemig. This is because the state Charter determines that the privatization of electricity distribution companies must be submitted to a popular referendum.

As BNDES is not private in nature, Cemig would therefore remain state-owned, eliminating the need to change the Constitution.

A popular referendum on the issue would complicate the entire process. A 2019 survey carried out by the Associação Mineira dos Municípios showed that 47.7% of those interviewed were against the sale of Cemig, 36.2% were in favor and 16.1% were undecided.

The numbers would certainly change amid political campaigns during the process — depending on the political forces that would support or criticize the sale.

Not surprisingly, Zema has been trying since the beginning of his second term to convince state deputies to remove this section of the Constitution — without success, for now, with resistance even from part of the government base.

The second path proposed by Fernandes, however, would be more complicated. Firstly, the federal government would need to be successful in the action in the STF that questions the difference between the government’s capital in Eletrobras (42.88%) and the voting capital in the same company (10%).

The company’s bylaws stipulate this rule for all shareholders as a way to prevent the formation of blocks to take control of the company.

If the case wins, the federal government would once again have voting power equal to its total capital and, thus, could propose the payment of the part of the state of Minas Gerais in the capital Cemig, in the capital of Eletrobras.

To achieve this, Fernandes analyzes the need for a change in the Minas Gerais Constitution or the call for a referendum, as for him the operation would be equivalent to privatization.

Once the payment was authorized, the new shareholding composition of Eletrobras, which is currently worth R$79.43 billion, would give the federal government around 49.5% of Eletrobras if the capital increase was not accompanied by the other partners. If it were accompanied, the current shareholdings would be maintained.

“It is important to highlight that the payment of the participation of the state of MG in Cemig to the assets of Eletrobras does not violate any of Cemig’s constitutional or statutory principles, since the company would continue to be under State control [governo federal] and which would have as its majority shareholder a company with the same purpose [Eletrobras]”, says Fernandes.

But other analysts interviewed by Sheet say they believe that this path is very complex and its advantages would not be worth the government’s effort.

Lawyer and economist Elena Landau, one of those responsible for the FHC government’s privatizations, says it is unlikely that the government will be able to convince other shareholders to integrate Cemig into Eletrobras.

“Furthermore, BNDES does not have the capacity to manage any company. It is just a credit bank”, he states in relation to the first path.

An important source in the electricity sector highlights that Cemig and Eletrobras shareholders have the right to withdraw — a mechanism that allows minority shareholders to sell their shares if they do not agree with relevant changes in the company’s organization. According to this source’s accounts, the operation could cost R$120 billion.

On Wednesday, the bank BTG Pactual released a report criticizing a possible federalization of Cemig and pointing out the risks of investing in the company at this time.

The bank questions the real impact that the sale of Cemig and Copasa would have on the state’s debt with the Union and calculates that the federal government may have to pay the company’s shareholders almost R$3.57 billion due to mechanisms similar to the right to withdraw .

“However, there may be strategic value for the federal government to control an electricity concessionaire as relevant as Cemig, especially after the privatization of Eletrobras”, analyzes the institution.

“We also believe that this could have a positive impact for Eletrobras, since the political noise surrounding the company could cool down if the federal government turned its attention to a concessionaire as relevant as Cemig”, he adds.

BTG, at least in this report, does not associate the federalization of Cemig with a possible maneuver by the federal government to increase its control over Eletrobras.