Batista Wager Leaves EON Funding Eneva Venture: Corporate Brazil

Apr 24, 2014 5:00 pm ET

(To set an alert for Corporate Brazil: SALT BZCORP)

April 24 (Bloomberg) -- Two years after partnering with Eike Batista and vowing to create Brazil’s biggest non-state energy company, German utility EON SE is facing the prospect of pumping more money into the venture without Batista’s help.

Eneva SA is the worst performing power producer stock among global peers since EON began building a 37.9 percent stake in April 2012. While sales rose almost 30-fold last year as six plants started operations, project delays have increased costs and forced the Rio de Janeiro-based company to buy on the spot market at a time of record prices, deepening its losses.

Now management led by former Goldman Sachs Group Inc.’s co- head of Brazilian investment banking Fabio Bicudo is in talks with shareholders including controllers EON and Batista, who has a 23.9 percent stake, to bolster Eneva’s finances.

“With Eike Batista, they backed the wrong horse,” Thomas Hechtfischer, director of the Deutsche Schutzvereinigung fuer Wertpapierbesitz shareholder association, said by telephone from Dusseldorf. Focusing on projects rather than operating assets exposed the venture to cost overruns, he said.

Batista, once the world’s eighth-richest man, sold assets or stakes in his energy, mining and transport ventures as missed targets and mounting debt forced the former billionaire to cancel projects. While shares in his logistics unit are down 10 percent since EIG Global Energy Partners LLC took control in October, Eneva tumbled 70 percent in the same span to the lowest since October 2008.

Shares of EON declined 0.4 percent to 13.775 euros in Frankfurt, the lowest close since April 17. Eneva slumped 6.9 percent to 1.35 reais in Sao Paulo, the most since Feb. 18.

Rule Changes

The power venture suffered as Batista’s collapse coincided with regulatory changes that Brazil implemented to try to reduce electricity prices, according to Adriano Pires, head of the Brazilian Center for Infrastructure consulting firm.

“They entered Brazil at a time when Eike was still the golden child,” Pires said by telephone from Rio. “Eneva is also another victim of the regulatory mess created by the intervention of the government in the electricity industry.”

Eneva traces its roots back to 2001, when Brazil last rationed power amid a drought that drained reservoirs. Batista set up a venture known as MPX to build a thermoelectric plant in the northeastern state of Ceara, the entrepreneur wrote in his 2011 book “O X da Questao.” As shortages subsided, Batista sold the plant to state-run Petroleo Brasileiro SA, pocketing a $50 million profit, he recalled in the book.

German Ties

With no revenue and plans to build eight plants in Brazil and one in Chile, MPX held an initial public offering in late 2007, becoming the second Batista company to be listed in Sao Paulo. It raised 2.2 billion reais ($990 million).

EON bought an initial 10 percent stake in 2012 for 850 million reais and laid out plans for a grand partnership. Batista, whose mother was German and who speaks the language after spending some of his youth in Dusseldorf, the city where EON is based, seemed the ideal partner.

Then Brazil’s richest person, his collection of commodities and energy startups were expanding at full speed and he was well connected with the government, a key advantage in a regulated industry such as electricity.

“Creating the largest private energy company in Brazil, together with MPX, will see us achieve our strategic aim to establish a significant market position in Brazil, one of EON’s target growth markets,” EON Chief Executive Officer Johannes Teyssen said at the time in a statement.

Reinforce Capital

While Eneva has become the biggest private thermoelectric generator in the country, it posted a record loss of 942.5 million reais last year and its debt-to-market value ratio is the highest after state-owned Centrais Eletricas Brasileiras SA among 148 major utilities in the Americas tracked by Bloomberg.

“In terms of financial issues, the management -- together with its stakeholders -- is actively working on a plan to reinforce its capital structure,” the utility said in an e- mailed response to questions. “The company is analyzing several alternatives and the plan will be announced in due time.”

The venture will return to profitability next year, according to analyst estimates tracked by Bloomberg.

EON’s press department referred questions to Eneva. Batista’s holding company EBX Group Co. declined to comment on Eneva project development in an e-mailed response.

Chile Exit

Eneva has about 2.4 gigawatt of installed capacity compared with the 14 gigawatt of “projects already licensed” that Batista spoke about at the time of the EON association. Plans to build a coal-fired plant in Chile were blocked by the country’s Supreme Court in August 2012 on environmental grounds.

The company said March 20 that it delayed the start of operations at its Parnaiba II gas-fired plant to the second half of the year. The utility also said it was studying options including selling assets and a capital increase to strengthen its balance sheet.

“High leverage exacerbated by operational issues, means that Eneva will likely have to undergo financial restructuring before monetizing its paper projects,” UBS AG analysts led by Lilyanna Yang said in a March 30 note to clients.

Eneva had total debt of 6.2 billion reais at the end of last year, according to data compiled by Bloomberg.

EON sank 367 million reais into the company in July as part of an 800 million-real capital increase, following the purchase of a 24.5 percent stake from Batista for 1.4 billion reais earlier last year. Batista stepped down as chairman of the venture on July 3 and the company changed its name to Eneva in September as EON moved to restore credibility.

Paying Price

While EON’s entrance was seen as a positive step toward completion of MPX projects, Batista didn’t deliver on his promises, said Ildo Sauer, a professor at Sao Paulo University, who negotiated with Batista the purchase of his first MPX power plant as head of Petrobras’ gas and energy unit.

“I am sorry for them because they have a long tradition of being a serious company,” he said, referring to EON.