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China Inc. Pursues Power, Glory With Big Brazil Deal
State Grid Corp. of China woos shareholders of Brazil’s CPFL Energia, chasing 13 billion dollars takeover
By KANE WU and JOHN LYONS
Aug. 9, 2016 7:31 a.m. ET
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China Inc. is looking to win a gold medal in deal making with a 13 billion dollars takeover of a Brazilian electric company.
State Grid Corp. of China, the world’s largest electricity provider by revenue, is wooing shareholders of CPFL Energia SA and a listed subsidiary, according to people familiar with the situation. It expects to secure stakes from big holders this month before making a full offer to the rest, according to the people.
The 13 billion dollars takeover value includes the assumption of debt.
The deal would be China’s biggest-ever investment in Brazil—and a fresh dose of foreign capital for a country slogging through one of its deepest recessions ever.
Highly profitable, cash-flush State Grid has been deploying more funds overseas as China’s economic engine slows; power demand in the first half of 2016 was up just 2.7% from a year earlier. In 2014, State Grid bought a 35% stake in Italy’s CDP RETI Srl for 2.8 billion dollars, and a year earlier it spent 3.7 billion dollars for a stake in Australia’s SP AusNet Ltd. and its units. In an earlier Brazil foray, the company in 2010 spent 1 billion dollars for seven small power-transmission companies in the country’s southeast.
The company has already picked up roughly 23% of CPFL from construction conglomerate Camargo Correa SA, in a 5.85 billion reais (1.85 billion dollars) deal announced last month. It also agreed to buy Camargo Correa’s stake in CPFL Renováveis, CPFL’s listed renewables unit, according to the July announcement.
State Grid is now courting other shareholders, including Latin America’s largest pension fund, Previ. Officials at Previ, which covers workers at state-owned Banco do Brasil and owns a 29.4% stake in CPFL, said in a statement that it is evaluating the offer.
The Chinese state-owned company is optimistic it will secure a controlling stake, according to a person familiar with the situation. That would trigger an offer for all the remaining shares at the same price.
Buying up electricity assets abroad is part of Beijing’s strategy to export its infrastructure-building capacity. In particular, State Grid is eager to take its growing expertise in ultrahigh-voltage, long-distance power transmission to new markets. The vast distances between Brazil’s hydropower resources and its big cities make it ideal for China’s technology. State Grid has already joined with state-owned electricity company Eletrobras to connect a planned 16 billion dollars hydroelectric dam in the Amazon jungle to the national electric grid.
CPFL has been in foreign hands before: For a stretch during the first half of the 20th century it was controlled by American & Foreign Power Co. Brazil’s government took over the assets as it pursued economic nationalism under a military dictatorship. The company was privatized during the economic overhaul of the 1990s.
Today the sprawling CPFL, made up of dozens of power companies, is one of Brazil’s largest utilities. It provides power to more than 500 municipalities in four states, including economically powerful São Paulo.
Chinese companies have been on a global shopping spree this year, announcing a record 159.4 billion dollars in deals overseas, including 12 billion dollars in power and utilities deals, according to Dealogic.
Resource-rich Brazil has become an increasingly important supplier of raw materials to China over the past decade or so. Trade was negligible as recently as the 1990s, but by 2009 China surpassed the U.S. as Brazil’s largest trade partner, buying up iron ore, soybeans and other commodities. The power deal would represent a broadening of economic ties, from trade in raw materials to Chinese ownership of a crucial cog in Brazil’s economy.
The CPFL acquisition is also tangentially related to a political flashpoint in Brazil. A separate construction arm of the Camargo Correa holding company has been unloading assets to raise money since being caught up in a sprawling cash-for-contracts corruption scandal that helped drive the impeachment of President Dilma Rousseff earlier this year.
Three former executives of the construction company, including its former chairman, were sentenced in that case last year. Camargo Correa spokesmen responded to requests for comment by referring to CPFL’s public statements about the State Grid transaction.
In the past, the company has said it is cooperating with the investigation and seeking to improve its corporate governance and control practices.
As China’s main grid operator, State Grid is a goliath. It covers 88% of the country and provides electricity to more than a billion people. It recorded a profit of 13.1 billion dollars last year on revenue of 312 billion dollars.
—Brian Spegele and Rogerio Jelmayer contributed to this article.
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