Marcelo Sá (Head of LatAm Utilities at UBS) has released a report assessing the primary offering recently announced by AES Eletropaulo. Below we present his analyses and thoughts related to this topic, as well as his considerations about how this is likely to be perceived by investors.

Primary offering to increase investment and improve capital structure

On 17 April, Eletropaulo announced it will issue 58.9m shares in a primary offering to fund its capex plan and improve its capital structure. Based on the current stock price of R$22/share, the company would raise R$1.490bn. Depending on the demand for the primary offering, the underwriters could increase the offer by 15%, or 8.8m shares.

The final price will depend on the conclusion of the book-building process (see timetable in Figure 1). On 16 April, Neonergia and Eletropaulo signed an investment agreement in which Neoenergia committed to subscribe to the primary offering at a price of R$25.51/share. Eletropaulo’s current shareholders have the right of first refusal; therefore, Neoenergia can only subscribe if Eletropaulo’s shareholders choose not to.

Neoenergia will submit a tender offer to buy control of Eletropaulo

Neoenergia announced it will submit a tender offer to buy control of Eletropaulo at R$25.51/share (a 16% premium to current stock price). The subscription in the primary offering and tender offering must be approved by Neoenergia’s board of directors in its next meeting on 20 April. Neoenergia is controlled by Iberdrola and has 4 distribution concessions, with one (Elektro) located near Eletropaulo.

Will Eletropaulo get a higher bid?

The possibility of another bid is hard to determine, given Eletropaulo’s rich valuation. At R$25.51/share, we estimate implied valuation of 1.66x EV/RAB, representing a meaningful premium to RAB. The most efficient discos we cover (Energisa and Equatorial) trade at 2x EV/RAB, while more inefficient discos such as Copel trade below 1x EV/RAB. On 5 April, Energisa’s board of directs approved a voluntary tender offer to buy control of Eletropaulo for R$19.38/share (see our 5 April note). In our view, the chances of Energisa outbidding Neoenergia is low.

Valuation: Under Review

Given the possibility of another tender offer, our rating and price target are now Under Review.

See Report provided by UBS: 

MarceloSA_Eletropaulo Is the bidding war ending_04-17-2018


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