A Bolivarian Blessing for a Revolutionary Businessman

Revolutionaries and multinational executives rarely make good friends. So one would hardly have expected Venezuelan President Hugo Chávez, a man often given to denouncing “neo-liberal barbarism,” to have given his blessing to a hostile bid by a big US power company for Venezuela’s largest publicly traded utility, a strategically important company that supplies power to Caracas.

Yet, the fate of Electricidad de Caracas was virtually sealed several months ago after a meeting at which Chávez gave Dennis Bakke, chief executive of Virginia-based AES, his “Bolivarian’ blessing for the operation. Shortly before AES announced its tender offer for EDC on April 28, Bakke emerged from the presidential residence of La Casona, in a Caracas suburb. A smiling Chávez said Bakke was a “revolutionary entrepreneur who wanted to invest in Venezuela.” Bakke dutifully responded, saying he had come to Caracas to “learn how to be a revolutionary businessman.’ Meanwhile, AES’s Chairman Francisco Aguerrevere, was hospitalized with heart trouble the week after AES announced its bid.

At the end of May, AES took control of EDC, paying $1.6 billion for 77% of the company. Although some analysts were puzzled at how a swashbuckling American capitalist could receive red carpet treatment in Caracas, it soon became clear that Chávez expected the takeover would bring him two major benefits.

If successful, the acquisition would help him fulfill his heartfelt desire to crush Venezuela’s old business and political establishment, which he blames for the country’s ills. That establishment included shareholders of EDC.

Also, after much criticism from Venezuela’s business sector that his pro-Cuban rhetoric was threatening to isolate the country, Chávez would be able to portray AES’s bid as a shining example of his government’s success in attracting foreign investment, especially useful with elections approaching.

AES, which already owned assets in Latin America’s three biggest economies – Brazil, Mexico and Argentina – had its eye on Venezuela for two years. “When we looked at the map of Latin America, Venezuela was a piece that was missing in the puzzle,” says Eduardo Dutrey, president of AES’s Argentine operations and coordinator of the company’s takeover team in Caracas. “We realized very soon that EDC would be an extraordinary vehicle for getting into Venezuela, because you would immediately have scale in the market and a strong presence in the biggest city.’

EDC, which posted net income of $124.3 million in 1999, produces about 12% of all Venezuela’s power, and serves about 4.5 million clients in greater Caracas. Unlike most Latin American utilities, EDC was never nationalized and the company’s main shareholders did not hold a controlling majority of the equity.

AES had drawn up a detailed strategy well before launching its tender. Although the blessing from Chávez gave the company the all-clear to launch its tender, AES would have to acknowledge several weeks later that it had still entered a battle fraught with risk and unexpected legal challenges.

Advised by Morgan Stanley Dean Witter in New York, AES began preparing for the tender in early March, discreetly accumulating during the following four weeks a 1% stake in EDC via the over-the-counter American Depositary Share market.

As the Caracas stock market, on which EDC was the benchmark stock, was firmly in a downtrend, it made sense for AES to hold back and let EDC’s share price to keep falling. Morgan Stanley was sufficiently discreet to make sure that its stock purchases on behalf of AES did not leak out or force up the Venezuelan company’s stock price.

Biding Its Time
In Caracas, where rumor and gossip are plentiful, the risk was mounting that news of the impending public tender would leak out or that AES might fall victim to front-running stock brokerages. Insiders also say that AES waited to get a clearer picture of the direction of Chávez’s policies before getting ready to pounce. Elections were scheduled for May 28, days before the month-long tender would expire, when political risk would be at its height, and equity prices at their weakest.

However, AES and its local stockbroker, Activalores, succeeded in keeping the tender under wraps, and EDC’s share price continued to decline until the moment AES unveiled its offer on April 28.

As Bakke left his meeting with Chávez, AES announced its tender for a minimum of 51% of the company. Thanks to the steady decline in EDC’s stock price, the company was valued at less than half its book value and AES could present its $860 million initial offer as extraordinarily generous – a 70% premium to the Venezuelan company’s closing share price the previous day.

EDC’s directors were taken completely by surprise. They had won shareholder approval at the end of last year for a stock buy-back program to cut the risk of a hostile bid. But they had ignored the advice of Arthur D. Little, their management consultant, to implement the program promptly. Instead, EDC kept its cash for future expansion plans.

EDC had little alternative but to rebuff the offer from AES, declaring that it undervalued the company. Spanish utility Endesa, which held an 8% stake in EDC, agreed.

Meanwhile, the legality of the bid was thrown into doubt as Venezuela’s National Securities Commission (CNV), ordered the first of three suspensions of the offer, on the grounds that a vehicle AES had set up to acquire EDC was insufficiently capitalized.

On May 12, EDC attempted to fend off the takeover by appealing to shareholders’ nationalist sentiment, demanding that they reject the AES offer and approve a $300 million share buy-back program instead. The move was designed to force AES to raise its bid and to buy time in the hope a white knight might come forward with a better offer.

AES duly raised its bid, increasing its premium to more than 100% and extended its tender by one week. It eased concerns that it might withdraw if it failed to obtain a majority stake. “We sent a very strong signal that we were here to win,” says Dutrey.

Behind the scenes, AES was orchestrating a move that insiders say may have been as crucial to the deal’s success as the meeting with Chávez.

Prompted by AES, some of EDC’s larger shareholders converted about 15% of EDC’s equity from ordinary shares in Venezuela into ADSs through the Bank of New York. With only 37% of EDC’s equity held in ADS form at the end of March, the conversion allowed AES to ensure that sufficient equity was available in the US for it to take control. Converting local stocks to ADSs would also cut shareholders’ local tax bill on the transaction.

But AES continued to run into regulatory snags. Concerned about being upstaged by a rival bidder, AES signed an option agreement with another Spanish utility, Union Fenosa, to sell it EDC’s non-core assets if its takeover succeeded, in return for a promise not to enter the battle. The CNV again temporarily blocked the tender, saying this agreement modified the terms of the earlier offer it had approved.

Then, in a last-ditch attempt to derail the tender, EDC took a 9.9% stake in Florida Public Utilities Company, in an apparent attempt to bring the battle under US jurisdiction. But AES said the US Securities and Exchange Commission had stated that its tender required no prior approval.

Eleventh Hour Snag
Finally, just 24 hours before its tender in the US was scheduled to expire, the CNV again suspended the offer after Caracas judges briefly upheld an injunction filed by one of EDC’s minority shareholders. AES had to extend its tender in the US by a day, as it waited for a statement from a judge in Caracas to clarify that the CNV indeed had no jurisdiction over the ADSs.

At last, the deal could be done. As news of the successful acquisition in the US reached Caracas, one senior cabinet minister close to President Chávez privately said he could barely contain his delight, adding that the move signaled the possibility of further takeovers of other Venezuelan companies in the months ahead.

AES’s Dutrey said dealing with the refusal of regulators and some shareholders to accept the notion of a tender was a greater challenge than the lack of clear rules. “Latin America is not a region where tender offers are as frequent as in say the Anglo-Saxon world, but we are going to see more,” he says. “This is the international trend slipping down to Latin America.”

Investor concern over Chávez may have diminished somewhat following Bakke’s victory. However, there are very few companies listed on the Caracas stock exchange vulnerable to hostile bids. Still, political and economic uncertainty have driven the value of Venezuelan companies down sharply. However, the conquest of EDC has not yet forced the CNV to clarify its takeover rules.

As thousands of EDC’s small shareholders in Caracas queued up to tender their shares to AES before the offer closed, EDC’s directors finally appeared resigned to the futility of resisting global economic forces. “We can’t detain the globalization process,” said Oscar Machado, EDC’s acting chairman and grandson of the man who founded the company 105 years ago.

“This a clear example of the forces of globalization at work, and it’s been EDC’s turn to learn that lesson.” And how revolutionary Bakke will be in charge of EDC’s assets remains to be seen. Indeed, Chávez may come to regret his support if the Americans begin selling assets, as they have promised, and start thinning the company’s ranks.