Enersis: Capital Increase or Asset Transfer

Energy group Enersis, Endesa Chile’s parent company, unveiled a capital increase of $8 billion on July 25— an influx that promised to be the biggest in Chilean history. The move confirmed the ambitions of controlling shareholder Endesa Espana, in turn owned by Italian utility Enel, despite troubles at home.

But rather than the popping of champagne corks, the announcement was met with angry murmurs in Chilean markets that turned to full-scale revolt.

At the center of it all were Chile’s pension fund administrators (AFPs). Together, they represent the second largest shareholder in Enersis. They complained that Enersis had offered a murky explanation as to why a share issue was necessary. But it was the terms of the transaction that sent Chilean investors into a state of apoplexy. Minority shareholders would have to buy the new shares with cash, but Endesa Espana would make its contributions in the form of assets– largely minority stakes in power plants and distribution firms not yet bundled into the Enersis structure.

Critics also questioned the valuation of these assets, which had been set by an independent expert, hired by Enersis.

The company put a price tag of $4.8 billion on the combined assets, but local investors believe the value is much lower. Investment bank LarrainVial suggested $3.6 billion would be closer to the mark.

In one example, Enersis accounts assigned a book value of zero for Argentinean distribution firm Edesur, citing recent losses and regulatory troubles. But the valuation conducted for the capital increase puts the company at $230 million.

This is not the first time that Chile’s AFPs have felt themselves on the sharp end of dealings with Enersis’ masters. Fifteen years ago, when Enersis’ Chilean owners sold their controlling stake to the Spaniards, they managed to negotiate much better terms than those offered to minority shareholders, including the AFPs. What had been first dubbed the deal of the century quickly snowballed into one of Chile’s biggest scandals since the return of democracy in 1990.

The case inspired new legislation to protect minority shareholders, including a requirement that transactions with related parties be approved by a committee of independent directors.

It is precisely this clause that Chile’s pension fund managers fear Endesa is trying to bypass today, by wrapping the deal up as a capital increase rather than a transfer of assets.

In the face of such strong opposition, Enersis and Endesa Espana have backtracked from their initial position, saying their valuations represent a starting point for negotiations.

But they may have to go further yet.

On August 3, after probing minutes of board meetings at Enersis, Chile’s securities and insurance regulator ruled the capital increase represents a conflict of interest. This could mean tearing up the original proposal and starting from scratch.

The end of the story, not so soon.


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