PROFILES

A look at three state-owned companies in Brazil attracting investor interest.

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BR MANIA

Convenience stores

BR Mania, a subsidiary of Rio de Janeiro-based BR Distribuidora, Brazil’s biggest fuel distributor, operates a network of franchise convenience stores at gas stations owned by its parent. Investors see this as a growth opportunity because its stores can be found in only 16% of the 7,665 gas stations operated by the fuel distributor. By contrast, Ultrapar’s Ipiranga, Brazil’s second-largest fuel distributor, has convenience stores in 35% of its 7,200 gas stations.

BR Mania’s competitive position may have been further undermined by a recent restructuring. BR Distribuidora, owned 71% by Petrobras, reduced the number of convenience store points of sale by 101 last year, according to regulatory filings. Meanwhile, Ipiranga continues to expand its network, adding 78 stores last year.

In March, XP Investimentos analyst Gabriel Francisco said privatizing BR Distribuidora, the parent, could allow the new owner to expand the BR Mania network. That, in turn, could boost the stock price of BR Distribuidora. Deeper penetration and higher productivity could drive the target price higher by 10%, in part because the stores attract more customers who then buy gas, says Francisco.

In February, BR Distribuidora said the São Paulo-based investment-bank BR Partners is working to find “business model alternatives” and to structure “strategic partnerships” for the unit. According to a regulatory filing, the bank is already “evaluating and selecting potential” investors. There was no mention of when the process will end.

Marcelo Fernandes Bragança, BR Distribuidora’s operations and logistic executive officer, said during an earnings conference call in May that one of these business models could take the form of a joint venture. A partner could potentially bring expertise, scale and assets, he said. BR Distribuidora may not receive any cash in such a transaction, but attractive assets could help the company, Bragança said.

CORREIOS

Postal service

Brazil’s post office Empresa Brasileira de Correios e Telégrafos, known as Correios, handles roughly 40% of Brazil’s ecommerce deliveries, a category that is forecast to grow at a double-digit pace for the next few years. The company is also diversifying its services, offering mobile plans and banking services.

Still, Correios, which traces its beginning to 1663, has a long list of problems. With about 105,000 employees, it has the largest workforce of all Brazil’s state-controlled companies. Labor costs is one reason that led the company to post four straight annual losses between 2013 and 2016. The postal service has made some headway on headcount. From a peak of 125,420 employees in 2013, Correios has reduced its workforce by 17%.

The company has also struggled with a burdensome employee health plan. Not only did Correios pay 93% of the cost, but the benefit was also offered to employees’ parents, expanding coverage fourfold to 400,00. Last year, a new plan was established with employees paying 30%. Meanwhile, the postal service’s pension fund reported that one of its plans had a deficit of R$6 billion last year because of fraud and bad investments.

Its fiscal health was further undermined when former President Dilma Rousseff froze some postal prices between 2012 and 2014 to combat inflation. Revenues tumbled until the restrictions were lifted. Correios returned to profit in 2017.

Correios may not sound like a good privatization candidate. But Piero Minardi, head of Brazil’s private-equity and venture capital association, ABVCAP, says the postal department should attract interest from strategic investors, sovereign funds and even private-equity firms. Correios ranked 11 among postal services in G20 nations when considering operational efficiency and public trust, according to a 2016 study by Oxford Strategic Consulting–ahead of SP Mexico and Correo Argentina, among others.

ELETROBRAS

Electric utility

It’s Latin America’s biggest power utility, responsible for 30% of Brazil’s power generation and half of the nation’s transmission lines. Even better for sustainable investors concerned about future regulatory restraints, almost all of its energy comes from clean sources, such as hydroelectric and nuclear plants.

One of the four crown jewels controlled by Brazil’s federal government­—the others, Petrobras, Caixa Economica Federal and Banco do Brasil, aren’t being privatized. Eletrobras is listed on the São Paulo stock exchange. Expectations the company will be sold have helped drive its share price 70% higher over the past year.

Last year, Moody’s said the privatization of Eletrobras could help the company’s deleveraging and investments plans. The sale would also diminish political interference in the company, according to the rating agency.

Eletrobras has taken steps to improve its financial position by exiting its money-losing distribution business and selling heavily indebted companies. Though it didn’t realize gains from the sale, it was able to reverse negative shareholder equity related to the distributors. The company also benefitted from a voluntary retirement program which will help it cut its workforce in half. Last year, Eletrobras posted a net income of 13.3 billion reais ($3.24 billion), reversing a 1.7 billion-real loss in 2017.

President Michel Temer’s previous administration had expected to auction the company this year. The projected 12 billion reais in proceeds from the anticipated privatization were even initially booked as revenue in the 2019 budget.

The Bolsonaro administration decided to postpone the sale and deduct the revenue from the budget, as it restructures a possible deal in hopes of a heftier sales price.. Even if the company isn’t sold in 2019, some investors expect its subsidiaries to be auctioned. Amaury Bier, CEO of Gávea Investimentos, says private-equity funds may be interested.

*Market estimates