AES Aes Corp

Brazil's cash-rich power industry is itching to consolidate, and some are making deals even in one of the toughest markets in decades.

The debt profiles of Brazil's power players have improved on rising electricity rates, while the share prices of companies that could be targets have slipped, making them more attractive. On top of that, Brazil's power sector, Latin America's largest, includes big names - some of which have big appetites for growth.

For example, Companhia Energetica de Minas Gerais (CIG), better known as Cemig, bought a 48% stake in three new wind farms for 213 million Brazilian reals ($92.3 million) this month.

Cemig was said to be in line to buy nearly a third in competing energy company CPFL Energia (CPL) last month for BRL2 billion, but CPFL partner Camargo Correa bought it instead.

Privately held Neoenergia's chief executive, Marcelo Correa, said the company has BRL2.6 billion in cash and said in local business daily Valor Economico recently that "everything is attractive to us at this point".

"Neoenergia and Cemig can be the consolidators in this market," said Sergio Tamashiro, an energy analyst at Itau bank in Sao Paulo. "Both have a lot of cash and Neoenergia could easily tap debt markets even in this kind of environment."

Some of these companies might not need to pile on debt to fund acquisitions. Cemig reported cash and cash equivalents of $3.01 billion as of Sept. 30 in its Form 6-K filed with the U.S. Securities and Exchange Commission in December.

The domestic credit market does appear to be loosening up. Central bank president, Henrique Meirelles, said Monday that local credit markets have returned to pre-crisis levels. Using 100 as a base for healthy credit availability, Meirelles said September was around 92.7 points and January was 101.

More credit should facilitate a mild recovery in investment, including in the power sector.

In late 2008, the government had to postpone a new transmission line auction because a number of local and international companies said they wanted to participate but couldn't get the financing for downpayments on the greenfield projects if they were winners.

The government held the auction a month later and participation was lower than expected.

Easier credit should also help drum up interest in beaten power sector asset prices, which have been undercut by slowing economic growth.

While it's expected to expand significantly less in 2009 than in recent years, Latin America's largest economy is still likely to grow a point or two this year, according to official estimates. Domestic consumer demand and signs that commodities may be finding a bottom bodes well for Brazil.

The recent performance of the country's stock market, by far the largest in the region by market capitalization, certainly suggests as much. Brazilian stocks are up 19% over the last three months in dollars on the MSCI index.

Both foreign and local power firms are expected to be on the lookout for attractive assets.

"Brazil will still be a key country for the international energy infrastructure firms," said Juan Carlos Fassi of the global energy section at the PA Consulting Group in Buenos Aires. "It was completely impossible for these guys to acquire companies (in Brazil) because companies were asking big money for their assets"

The global credit crisis and a weaker real - down nearly 30% year-to-date - has lowered the share prices of Brazil's publicly traded utilities, even though they have outperformed the market. Utilities in general are defensive stock picks in economic downturns because of consumers' constant, baseline demand for electricity.

"The international energy companies that want to be in Latin America will more than likely keep their focus on Brazil simply because the market, the regulatory policies and the politics there are better than anywhere else in the region," Fassi said.

Brazil's biggest international energy names include AES Corp (AES), Energias do Portugal (EDP.LB), and the Spanish groups Endesa SA (ELE.MC) and Iberdrola (IBR.MC).

Most of the these companies will likely partner with local energy players by acquiring a stake in existing companies or by joining forces in new energy auctions for greenfield projects run by energy regulator Aneel.

Although France's GDF Suez (GSZ.FR) has its hands full building hydroelectric dams, it could pounce on Brazilian power assets at any time, said sector consultant Alexandre Montes at Lopes Filho & Associates in Rio de Janeiro.

"Suez is interested in anything that gives them a good return on investment," he said. "Don't count them out of the scenario because Suez has a very big appetite."

GDF Suez Energia Brasil chief executive, Mauricio Bahr, was unavailable to discuss the companies expansion model.

For companies looking to grow through M&A, the well is fairly dry for 100% acquisitions, though there are a couple of immediate targets, said Montes.

He pointed to Endesa-owned Companhia Energetica do Ceara, or Coelce, and Ampla Energia e Servicos, owned by Enersis SA, a subsidiary of Endesa in Chile.

Local media reports said Endesa is looking to sell out of some of its Brazilian power assets. The press office for Endesa in Brazil neither confirmed nor denied the reports of an exit strategy.

If they do put some of their assets up for sale, "Cemig is a serious contender to buy Ampla from Enersis," Montes said, citing its location on Cemig's home turf of Minas Gerais and Rio de Janeiro states.

Cemig's chief financial officer, Luiz Rolla, did not return calls for comment this week and Neoenergia's CEO declined to comment.

According to Fitch Ratings, Brazilian energy companies have rarely been in such good shape. The majority of them have improved their credit profiles over the last five years, thanks in part to rising demand and rising electricity rates, FitchRatings analysts wrote in a recent report on Latin America's energy segment.

Companies have also benefitted from lowering short-term debt obligations, so that most of the debt on the books is long term and not denominated in dollars, eliminating risks from foreign exchange fluctuations.

-By Kenneth Rapoza, Dow Jones Newswires, 5511-2847-4541, kenneth.rapoza@dowjones.com

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