The Caisse Tags Brazil in Major Deal?

Benefits Canada reports, Caisse taking stake in Brazilian oil and gas transportation company:

The Caisse de dépôt et placement du Québec and French utility company Engie are buying a combined 90 per cent stake in Brazilian oil and gas transportation network company Transportadora Associada de Gás S.A. for US$8.6 billion.

The new arrangement, which gives Engie a 58.5 per cent stake in TAG and the Caisse the remaining 31.5 per cent, was the result of a competitive bid process conducted by Brazil’s Petróleo Brasileiro S.A. — Petrobras, which will retain a 10 per cent stake in the company.

“Our first infrastructure investment in Brazil represents an important step in the geographic diversification of our portfolio, a key component to long-term performance,” said Emmanuel Jaclot, the Caisse’s executive vice-president of infrastructure, in a statement.

Engie will be responsible for operating and maintaining TAG after its third year of ownership. The sale is dependent on approval from Petrobras’s shareholders and anti-trust authorities in Brazil and the European Union.

TAG has approximately 4,500 km of gas pipeline infrastructure in Brazil. Engie currently operates more than 32,000 km of gas pipelines in Europe and South America.

Maurício Bähr, Engie Brasil’s chief executive officer, said in a statement the company’s strategic objective is “to grow in renewable energies and infrastructures, such as transmission lines and the gas chain.”

Sudip Kar-Gupta of Reuters also reports, Consortium that includes Caisse seals $8.6 billion purchase of Petrobras pipeline unit:

A consortium led by French utility Engie has won a bid for Petrobras’ TAG pipeline arm with an US$8.6 billion offer, in a deal that boosts Engie’s presence in the fast-growing Brazilian market and helps Petrobras cut debts.

Engie said on Monday its successful offer for a 90 per cent stake in TAG was made alongside Canada’s state-owned financial and investment firm Caisse de Dépôt et Placement du Québec, with more than US$310 billion under management.

Petrobras will keep the remaining 10 per cent.

Engie said buying TAG, which accounts for 47 per cent of Brazil’s entire gas infrastructure and achieved core earnings of US$1.14 billion in 2018, would provide a steady stream of profits.

It will add to Engie’s presence in Brazil, where its unit owns assets including hydroelectric plants, thermoelectric facilities and renewable energy sources.

“Our acquisition of TAG is a significant milestone for Engie in Brazil, a key market for the group where we have been present for 23 years,” said Engie Chief Executive Isabelle Kocher.

Under Kocher, Engie has been focusing investments on energy services, renewable energy and infrastructure, while selling out of coal-related assets.

“It is a good diversification for Engie,” said Clairinvest fund manager Ion-Marc Valahu, whose firm owns Engie shares. “Also, Engie will benefit from growth expectations in Brazil.”

Engie said the acquisition of TAG would result in its net debt increasing by around 1.6 billion euros (US$1.8 billion). The consortium secured around US$6 billion in financing to help fund the acquisition from 10 banks, three local and seven international. It did not name the lenders.

Engie shares edged up 0.6 per cent in early trading on hopes the positive elements of the TAG deal would override any concerns over the rise in Engie’s debts.

“TAG will allow Engie to accelerate its development in the gas sector in Brazil, where Engie is already present in terms of the country’s electricity sector,” said Roche Brune Asset Management fund manager Gregoire Laverne, who said Engie was a stock his firm was considering buying.

The TAG divestment represents a victory for Petrobras’ leadership and its Chief Executive Roberto Castello Branco, who is pushing to unload assets in a bid to cut debt and refocus on exploration and production.

In September 2016, Petrobras sold a larger gas network pipeline, Nova Transportadora do Sudeste, for US$5.2 billion to Brookfield Infrastructure Partners LP, which beat out a bid by Engie.

Reuters also reports, Caisse de Dépôt on team buying Petrobras' gas pipeline unit for $9 billion:

Brazilian state-run oil company Petroleo Brasileiro SA has agreed to sell its TAG natural gas pipeline unit to a consortium led by France’s Engie SA for roughly US$9 billion, Bloomberg News reported on Friday, citing a source.

The Engie consortium, which also includes Canada’s Caisse de Dépôt e Placement du Québec, beat out two competing consortia, led by Itausa Investimentos Itau SA and EIG Global Energy Partners with Mubadala Investment Co, respectively, Bloomberg said, citing a source with knowledge of the matter.

Petrobras, as the company is widely known, and Engie declined to comment.

Sources told Reuters last month that Petrobras was accepting the final round of bids for its TAG gas pipeline unit on April 2, which was expected to bring in several billion dollars and will likely be the company’s largest divestiture in Petrobras’ asset sales program.

The oil company had been targeting a sale of a 90 per cent stake in TAG, which operates about 2,800 miles (4,500 kilometres) of gas pipelines.

The Caisse put out a press release, ENGIE and CDPQ make the winning bid in the process to acquire TAG:

ENGIE, a world energy leader, announces that together with Caisse de dépôt et placement du Québec (CDPQ), a global institutional investor, it has made the winning bid in a competitive process conducted by Petrobras for the acquisition of a 90% shareholding stake in Transportadora Associada de Gás S.A. (TAG) with a final and binding offer amounting to US$8.6 billion.

ENGIE will have a stake of 58.5% in the asset (of which 29.25% through ENGIE Brasil Energia) and CDPQ will have a stake of 31.5%, while Petrobras will maintain a 10% stake in TAG’s capital. In addition to its ownership, ENGIE will be responsible for the operation and maintenance after the third year.

The transaction is conditional to the approval of the Extraordinary General Meeting of Petrobras and the Conselho Administrativo de Defesa Econômica (CADE) (the Brazilian anti-trust authority) and the European Union anti-trust authority.

TAG represents ENGIE’s debut in the natural gas segment in Brazil and is aligned with the Group’s global strategy to rebalance the geographic and regulatory exposures of its networks activities by strategically positioning itself on the steadily growing Brazilian gas market, while generating additional revenues. It will contribute to its ambition of leveraging sophisticated large-scale energy infrastructures such as the TAG pipeline, to accompany the cost-efficient diversification and decarbonization of the energy mix in its core countries.

The investment is also in line with ENGIE’s goal of generating revenues from assets in infrastructures – such as gas pipelines – and where agreements are long term. The business will allow ENGIE to diversify its activities in Brazil while enhancing its position in Latin America. ENGIE will bring its international experience of operating gas pipelines in competitive markets to the Brazilian domestic market. ENGIE currently operates more than 32,000 km of gas pipelines in Europe, Mexico, Chile, Argentina and Turkey.

TAG

TAG is the largest natural gas transportation network owner in Brazil with approximately 4,500 km of gas pipeline infrastructure located along the coast of the Northeast and Southeast regions in addition to a stretch linking Urucu to the city of Manaus (AM). The network also has 12 gas compression stations (6 proprietary and 6 subcontracted) and 91 delivery points.

ABOUT ENGIE

ENGIE is the largest private power producer in Brazil, operating an installed capacity of 9,775 MW in 56 power plants, which represents about 6% of the country's capacity. The Group has 90% of its installed capacity in the country generated from clean, renewable sources with low emissions of greenhouse gases.

The Group also operates in the commercialization of energy in the free market and is among the largest companies in distributed photovoltaic generation. It has a complete portfolio of integrated solutions focused on cost reductions and improving infrastructure for companies and cities. The solutions focus on energy efficiency, energy monitoring and management, contract management of power supply, public lighting, HVAC systems, telecommunication, security as well as urban mobility systems for smart cities. With 2,300 employees, ENGIE’s domestic turnover was of R$ 9.3 billion in 2018.

ENGIE is a global reference in low-carbon energy and services. In response to the urgency of climate change, our ambition is to become the world leader in the zero-carbon transition of our customers, in particular businesses and local authorities. We rely on our key businesses (renewable energy, gas, services) to offer competitive turnkey solutions "as a service." With our 160,000 employees, and our customers, partners and stakeholders, we are a community of imaginative builders, committed every day to more harmonious progress.

Turnover in 2018: 60.6 billion euros. The Group is listed on the Paris and Brussels stock exchanges (ENGI) and is represented in the main financial indices (CAC 40, DJ Euro Stoxx 50, Euronext 100, FTSE Eurotop 100, MSCI Europe) and non-financial indices (DJSI World, DJSI Europe and Euronext Vigeo Eiris - World 120, Eurozone 120, Europe 120, France 20, CAC 40 Governance).

ABOUT CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at December 31, 2018, it held CA$309.5 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

This is a great long-term investment for ENGIE and the Caisse. I emphasize long-term because Brazil's economy has been rocky these last couple of years.

Still, Brazil is going to grow strongly over the next decade and this is a great infrastructure play for the Caisse to capitalize on that growth and have an expert partner owning a majority stake in TAG by its side.

After the third year of ownership, ENGIE will be operating and maintaining this asset and the Caisse will continue to be invested in a major Brazilian oil and gas transportation network company.

Think about the dollar amount we are talking about here. Close to US $9 billion, over 30% of which is put up by the Caisse. This is a massive amount and that's why the Caisse needed a strong partner who is taking a majority stake and has the technical knowledge and experience to operate and maintain this asset.

But with a profit of US $1.14 billion in 2018, both the Caisse and ENGIE stand to gain a very nice return on their investment if ENGIE can maintain and expand earnings growth.

Another thing I like about this deal is the fact that in September 2016, Petrobras sold a larger gas network pipeline, Nova Transportadora do Sudeste, for US$5.2 billion to Brookfield Infrastructure Partners LP, which beat out a bid by ENGIE. Any time I see Brookfield doing a similar deal, it reassures me.

Moreover, there are other important alignments of interests. ENGIE's Chief Executive Isabelle Kocher has been focusing investments on energy services, renewable energy and infrastructure, while selling out of coal-related assets.

After exceeding its target for low-carbon assets in 2018, the Caisse is now aiming to boost its low-carbon holdings to $32 billion by 2020, according to its second annual stewardship investing report:

In 2017, the pension fund started with $18 billion in low-carbon assets in its portfolio and raised that to $28 billion by the end of 2018. It’s also measuring its carbon emissions per dollar invested and achieved a 10 per cent reduction in 2018, moving towards its 25 per cent reduction target for 2025.

“In 2018, we acted on several fronts to meet our objectives, because we understand our financial performance will only be as sustainable as the world we invest in,” said Michael Sabia, president and chief executive officer of the Caisse, in a press release.

So, this major infrastructure investment in Brazil's gas market along with ENGIE fits well into the Caisse's low-carbon world.

What else? Even though Brazil's economy has been sluggish, there are signs economic activity is picking up and its stock market has been soaring following the election of Brazilian President Jair Bolsonar. It's also worth noting Bridgewater, the world's largest hedge fund, recently turned bullish on Brazil.

The biggest challenge facing the Brazilian economy right now is reforming the country’s social security system to put public finances back on track. It should try to emulate what we have done in Canada with CPP and CPPIB but in a country notorious for political corruption, I don't see this happening.

In other related news, it was recently announced the Caisse has reached an agreement to acquire a thirty percent stake in the main operating subsidiary of Vertical Bridge Holdings, LLC, the largest private owner and operator of communications infrastructure in the United States.

Not much to add on this deal except to say with the advent of 5G, this too is a great deal over the long run for the Caisse and its members.

Below, in late February, ENGIE CEO Isabelle Kocher discussed the energy and environment services company's earnings outlook and growth strategy with Bloomberg's Guy Johnson on "Bloomberg Markets: European Close." Smart lady, listen to her long-term strategy.

Also, late last year, Mrs. Kocher discussed how ENGIE is doing its part to transform France's economy following the gilets jaunes protests on a French radio show. Only in France will you see a female CEO of a major company come out to discuss important socio-economic issues.

Lastly, on the occasion "Movin’On: the World Summit on Sustainable Mobility" in Montreal in June 2018, Isabelle Kocher shared her vision and proposed concrete steps to find actionable solutions to sustainable and connected mobility. Other ENGIE employees share their insights.