BG, Shell buy Brazil's biggest gas distribution company

BG plc and Royal Dutch/Shell have purchased Brazil's biggest natural gas distribution company, Cia. de Gas de Sao Paulo (Comgas), for almost $1 billion.

The purchase price of $992.7 million represents a premium of 119% over the reserve price of $452.5 million.

The BG/Shell combine beat out three other bidders. Originally, 20 bidders came forth for the privatization auction, but only 4 made mandatory security deposits.

According to Sao Paulo Vice Gov. Geraldo Alkmin, "The premium was much higher than we expected. This will mean acceleration of privatizations of other state properties."

The recent implementation of legislation ending the petroleum monopoly of state firm Petroleo Brasileiro SA, as well as other deregulation and privatization moves in Brazil, has set off a scramble among foreign companies to invest in the energy sector of Latin America's largest country.

New owners' plans

BG Gas and Shell see significant growth potential for the natural gas sector in Sao Paulo state, where Comgas operates. Of Comgas' 300,000 gas consumers, about 94% are industrial, 3% are commercial, and only 2% are residential. Comgas' new owners aim at increasing those customer segments by 6%, 11%, and 10%, respectively.

Even though Comgas is Brazil's largest gas company, it supplies only 17 of 645 urban areas in Sao Paulo state. Comgas will look at expanding its gas pipeline network, reaching cities outside the city of Sao Paulo and further developing the existing one in the Sao Paulo metropolitan area. Comgas's gas distribution network covers about 2,400 km, and plans call for expanding it by about 400 km in 5 years.

The firm currently sells about 3.7 million cu m/day of natural gas, and hopes to increase this volume to 12 million cu m/day in 8 years, according to Mauro Arce, Sao Paulo state's energy secretary.

BG's president for Latin America, Dioclecio Araujo, predicts that Comgas's market share in the Brazilian natural gas sector will grow to 12% from the current 2% in 10 years.

New owners

Analysts estimated before the auction that the winning bidders would pay a premium of about 40-50% over Comgas' reserve price.

BG will hold a 70% stake in Comgas, and Shell will have a 26% share. The remaining 4% will belong to the Brazilian electricity company CPFL, which will enter into a partnership with BG and Shell.

BG, formerly British Gas plc, holds natural gas reserves in Argentina, where it has a partnership with Metrogas, and in Bolivia. A BG official said that the firm plans to bring natural gas from those two countries to Brazil.

BG has a partnership with Petrobras, Shell, Australia's BHP Pty. Ltd., El Paso Energy Corp., and Enron Corp. in the Brazil-Bolivia pipeline.

Former owners

Comgas was formerly controlled by Sao Paulo state energy utility Cesp, which will also begin privatization in the first half of this year.

"The money Cesp will get from the sale of Comgas will be used to alleviate the company's huge debt," Arce said.

Cesp, a holding company that controls four power generating subsidiaries, will see three of those generating units privatized in the first half.

The first generating unit is scheduled to go to private hands in May. The state-owned company will keep control only of its power transmission unit.

Comgas's successful privatization auction, according to Arce, will benefit Cesp's privatization process, because it will increase Cesp's net worth and may raise the company's reserve price. Cesp's reserve price will be announced by the end of this month.