Brazilian Adventure A German Utility's Multibillion Risks Abroad

Looking for new growth markets, executives at German electrical utility company E.on saw what they thought could be a golden opportunity in Brazil. Now their local partner is threatened with major financial problems and the joint venture MPX may face billions in potential losses.

EPX Group

Johannes Teyssen had high hopes for the business in Brazil. He sought to breathe a little life into the stolid German electric utility E.on with the investment, and to show board members and critics alike that there are growth markets outside Germany worth investing in.

Teyssen's potential partner seemed a perfect fit: Eike Batista, a Brazilian of German origin, a multibillionaire, successful businessman and, unlike E.on executives, intimately familiar with the country, people and often-volatile politics of Brazil.

Teyssen, 53, didn't hesitate long before buying a 10-percent share of the Brazilian energy company MPX from Batista last year, for about €350 million ($455 million). Teyssen raved about what he called a milestone. Brazil, he said, was a growing and energy-hungry country, and MPX was very well positioned to satisfy this demand. The E.on CEO sounded almost overconfident when he said that his company looked forward to many "exciting things" with its new joint-venture partner.

Teyssen discovered just how exciting it is about four weeks ago, when Batista surprised the company with the news that he and his group of companies were in financial trouble. For Teyssen, this seemed inconceivable. Only last year, Forbes had listed the man in 8th place in its list of billionaires. At the time, the magazine estimated his net worth at $27 billion. "There was no indication that the man could run into difficulties," says an advisor to E.on CEO Teyssen.

A Precarious Situation

But that was exactly what happened. The value of Batista's Brazilian holding company EBX, which includes various natural resource, logistics and energy companies, plunged from $25 billion to $10 billion within a few months. It also owes hundreds of millions in back taxes. Bad speculation is apparently the cause of EBX's woes. To keep his empire afloat, Batista now plans to sell off portions of his holding company, including shares in its electricity subsidiary MPX, in which E.on now holds a 10-percent stake.

It's a precarious situation for the Düsseldorf-based utility, because it leaves Teyssen and his management with two options. First, E.on could pull out of Brazil and try to sell its MPX shares with as small a loss as possible. This would put an end to the appealing narrative of rapid growth in an emerging company, and beleaguered Teyssen would suffer yet another defeat.

The alternative would be for E.on to buy more shares in the company from Batista -- so many that no other company would be able to gain control over Brazilian electric utility MPX. But this option also has its downsides. It would require E.on's Düsseldorf-based managers, with their German corporate culture, to assume significantly more operational responsibility in Brazil. It would force them to build power plants, plan electricity grids and sell products in a country with whose customs they are unfamiliar.

Teyssen's critics say this is hard to imagine in a company that failed to predict Chancellor Angela Merkel's decision to phase out nuclear energy after Fukushima. E.on executives seemed caught off guard by the development, which would ultimately strip away a core area of the company's business, despite the fact that the previous government had already approved such legislation, only to see it overturned and then essentially reinstated by Merkel.

Cash Strapped

In addition, an investment of this magnitude, depending on how many shares were purchased, would cost between €500 million and 2.5 billion -- money E.on doesn't have.

The company is burdened by almost €36 billion in debt. Worse yet, close to two years after the forced shutdown of eight nuclear power plants, Teyssen still lacks a convincing plan for getting E.on back on track to profitability and its old size.

As a result of the unconstrained boom in renewable forms of energy, like solar, wind and hydroelectric power, many E.on power plants are either out of commission or only connected to the grid for days at a time. Selling power, once the preserve of the major suppliers, is hardly profitable anymore, now that electricity prices have dropped to historical lows. Even the natural gas market, once a guarantee of billions in profits, has declined considerably because of the lack of demand from large gas-fired power plants.

The development also affects E.on competitors in Germany, like RWE and EnBW. But while they try to develop new strategies for the domestic business and, like RWE, position themselves as a chain of municipal utilities, Teyssen is increasingly withdrawing.

In only two years, Teyssen has sold off portions of the business worth more than €17 billion. This includes choice items like power and natural gas grids, holdings in companies like Russia's Gazprom and regional companies with thousands of customer contacts, like E.on Thuringia, which were once part of E.on's core business.

Growth in Difficult Markets

To economize even further, the E.on executive board cut more than 11,000 jobs. But instead of using the money to develop new business units or strengthen existing ones, Teyssen is paying off debts with the billions in savings. He intends to grow abroad, primarily in such difficult markets as Russia, Turkey and Brazil, where he sees enormous opportunities. Company officials say that his positive assumptions have even been exceeded to date.

Negative examples, like steelmaker ThyssenKrupp, which sunk more than €5 billion in the construction of a steel mill in a Brazilian mangrove swamp, partly because its managers had completely underestimated the country's idiosyncrasies and difficulties, have left Teyssen undeterred.

He seems determined not to give up the investment in Brazil. In fact, he has been trying for weeks to convince other European utility companies and Brazilian investors to become partners in the venture. For E.on, the ideal scenario would involve Batista keeping a stake in the company, so that several parties could share the risks and opportunities.

At the same time, Teyssen's financial experts are also calculating how E.on could pay for its future structure alone. One option would be to sell off additional regional companies. E.on officials say that the divestitures could amount to up to €20 billion.

Spinoffs of parts of the company with subsequent IPOs are also being discussed. For instance, there have been plans for weeks to transform E.on's renewable energy division, with its worldwide wind farms, biogas plants and solar farms, into an independent company. It could then be spun off and later be taken public. An outside management consulting firm developed the plan. This sort of a spinoff could raise several billion. E.on says that the plans not currently under consideration, nor were they commissioned by its management.

Board Grows Impatient

Nothing has been decided yet, and all possible decisions still require supervisory board approval. This is unlikely to be a sure-fire success.

For a long time, E.on's supervisory board supported Teyssen's approach, and it was unwilling to blame him for the consequences of Merkel's precipitous nuclear phaseout and shift to green energy. But now many board members are gradually becoming impatient. Teyssen's management seems too unconventional and his prognoses too optimistic to board members, especially when it comes to his pet projects abroad. "Now we tend to check things twice," says a labor representative.

About two weeks ago, Werner Wenning, the former CEO of Bayer and current chairman of the RWE supervisory board, lured away Leonhard Birnbaum, a former McKinsey consultant and member of the RWE executive board for many years. Birnbaum will be in charge of strategy and major projects on the E.on executive board, and will also keep a critical eye on Teyssen's decisions, which he has made alone until now.

This coup could be arriving too late for the adventure in South America. Birnbaum won't be able to start his new job until after the summer vacation period. But the decision over Batista's electricity subsidiary, MPX, can't wait until then.

Translated from the German by Christopher Sultan

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