Spain's Gas Natural plans to invest 400 million reals in its natural gas distribution concession in Brazil's southern Sao Paulo state during the next 5-10 years.
The company also plans to build at least one gas-fired thermoelectric plant in the area; the proliferation of such plants will be a key driver of Brazil's expected skyrocketing growth in gas demand.
Gas Natural acquired the right to distribute gas under the concession at a state-sponsored privatization auction late last month.
Gas Natural swept aside competitors in the auction for the final gas distribution area in Sao Paulo, Brazil's largest and most industrialized state. The company paid 533 million reals, a full 461% over the asking price of 95 million, said Secundino Munoz Velasco, Gas Natural's director for Brazil
"The premium was well above our expectations...We're highly satisfied with the result," said Mario Covas, governor of Sao Paulo state.
A member of one of the bidding groups appeared stunned at the size of the winning bid. "To say they paid a high premium is an understatement...They must have their reasons for paying that much, but frankly I can't see an upside of 250 million real," said the source.
But Gas Natural desperately wanted the southern area concession, after having bid unsuccessfully for the state's other two distribution areas.
"One of the major aspects of our decision to make such a strong bid was the fact that it was our last chance to enter Sao Paulo's gas distribution sector," said Velasco.
Expansion strategy
Sao Paulo is an essential part of Gas Natural's expansion strategy for Latin America.
"Sao Paulo and Rio de Janeiro are the key areas in Brazil's energy sector, and we couldn't run the risk of being shut out of Sao Paulo," said Velasco.
Gas Natural already owns a stake in the CEG and Riogas distributors in Rio de Janeiro.
And Spain's Repsol-YPF SA, Gas Natural's controlling shareholder, has made no secret of its plans to expand throughout Latin America.
Velasco said the company will invest around 400 million reals in the area by 2010 and will build about 300 km of gas pipelines, surpassing the minimum contractual requirement of 200 km. Funds for the acquisition, which must enter the country by the end of May, will come from the company's cash flow.
According to the director, the company plans to build one thermoelectric power plant in the area, although he did not rule out constructing more. He estimated the plant would have a capacity of around 1,000 Mw and said it may be operational by 2001.
Fernando Carvalho Braga, executive secretary of Sao Paulo's privatization program, believes that the company's plans for thermoelectric plants were key to the decision to pay such a high price. "The upside is never generated by distribution but by plans for the construction of thermoelectric plants."
Velasco said that the Rio de Janeiro distribution operations have been slow to show a profit, largely due to problems inherited from the previous owners. However, the fact that the Sao Paulo concession is a grassroots project should make it easier to get started, he said.
Gas Natural controls 85% of Spain's gas market, with a turnover of 3.17 billion euros. In Latin America, the company has operations in Mexico, Colombia, Brazil, and Argentina.
The company has over 3 million customers in Latin America, with over 500,000 in Brazil.
