AES AND BRV REACH AGREEMENT ON ELECTRICIDAD DE

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000302 SIPDIS SIPDIS TREASURY FOR KLINGENSMITH AND NGRANT COMMERCE FOR 4431/MAC/WH/MCAMERON NSC FOR DTOMLINSON E.O. 12958: DECL: 02/08/2016 TAGS: ECON ENRG EINV PGOV VE SUBJECT: AES AND BRV REACH AGREEMENT ON ELECTRICIDAD DE CARACAS SALE REF: A. CARACAS 59 ¶B. CARACAS 132 ¶C. BROWNFIELD-DESK EMAIL 2/7/07 Classified By: Ambassador William R. Brownfield, for Reasons 1.4 (b) an d (d). ¶1. (C) Summary: AES Corporation and the BRV have reached a deal for the sale of Electricidad de Caracas (EDC), Venezuela's largest private energy company. The BRV will pay AES 739 million U.S. dollars for its 82.14 percent interest in EDC and will buyout minority shareholders at the same price. AES Latin America President Andres Gluski told the Ambassador on February 8 that the AES Board of Directors was pleased with the terms of the deal which was close to EDC's three year average market capitalization. According to Gluski, the BRV remained concerned about possible USG retaliation and, despite Chavista rhetoric, the decision to nationalize EDC was motivated more by "kleptocracy" than socialism. Negotiations also highlighted tensions between Vice President Jorge Rodriguez and Minister of Energy and Petroleum Rafael Ramirez. End Summary. -------------- BRV Strikes Deal with Content AES -------------- ¶2. (C) Ambassador, EconCouns and EconOff met with Andres Gluski, President of AES Latin America, on February 8 (strictly protect). Gluski told us that AES Corporation had struck a deal with the BRV on February 5 to sell its 82.14 percent stake in EDC. He said that AES would have preferred to stay in the Venezuelan market, but since it was becoming increasingly difficult to do business here, AES was willing to walk away with a fair price. EDC depends on PDVSA for its fuel needs and realized that the BRV could ratchet up the pressure on AES to leave through mobilizing unions, and increasing fuel prices and import taxes. "It's like negotiating with a gun to your head," commented Gluski. He speculated that less than half of EDC's 2,600 employees were in favor of the nationalization. (Note: Gluski was also formerly a senior executive of CANTV and Director of Public Credit in the 1990s. End Note.) ¶3. (C) Gluski repeated that the deal was a good one for AES and its shareholders and that his Board of Directors was pleased. AES will be paid in U.S. dollars at roughly the average market capitalization over the past three years, according to Gluski. At a February 8 signing ceremony with AES CEO Paul Hanrahan and Minister of Petroleum and Energy Ramirez and Vice President Rodriguez, it was announced that AES is to receive USD 739 million for its shares. Gluski said that the deal did not appear to make economic sense for the BRV and it would take at least 10 years to fully pay off the purchase price. EDC shares are traded on the Caracas stock exchange and as ADRs on the Madrid stock exchange. The BRV will buy out EDC minority shareholders at the same price per share as the AES shares. The BRV agreed to pay in U.S. dollars to off-shore accounts, not through CADIVI, the BRV's official foreign exchange mechanism. EDC will also be allowed to issue a dividend prior to the closing. Ramirez said that PDVSA would initially hold the shares. Gluski emphasized that fair treatment of minority shareholders was an important feature of the deal and reflected AES' commitment to corporate responsibility. AES wanted to avoid giving the impression that "the gringos were running out with their money," quipped Gluski. If AES were to return to Venezuela, it would be able to return with its reputation and goodwill unharmed by the nationalization process. -------------- - Insights into BRV Techniques and Personalities -------------- - ¶4. (C) Gluski gave us some insights into how the BRV negotiates. After Chavez' initial announcement on January 8 that the BRV would move to nationalize EDC (Reftel A),AES sent the BRV four letters that all went unanswered. Several weeks ago, Gluski then received a phone call requesting AES' presence at a meeting at PDVSA's Caracas office and was greeted by the negotiating team tasked to nationalize the company. Incredulous, Gluski asked who authorized the negotiation. He was then ushered into the adjoining room where Minister Ramirez was seated. CARACAS 00000302 002 OF 003 ¶5. (C) Gluski told us that the negotiations were professional and mainly conducted with New York lawyers representing the BRV. He said that the parties even discussed drafting the agreements pursuant to NY law. He opined that the negotiations were conducted fairly for two reasons. First, the BRV still "fears" the United States. The BRV realizes its vulnerability in the oil sector, where it needs U.S. investment and know-how. This is especially relevant in the Faja. The BRV is also concerned that the USG could slap retaliatory tariffs on Venezuelan oil exports. Second, AES owns its interest in EDC through a Dutch off-shore company and could have taken the BRV to international arbitration proceedings through the Dutch-Venezuelan bilateral investment treaty. ¶6. (C) Gluski said that both parties hoped to close by March 31, although Minister Ramirez mentioned April 30 during the televised announcement later that evening. Gluski thought that the BRV's timeline was driven by the May 1 Labor Day parade. Chavez wanted to see EDC workers marching through Caracas wearing Chavista red shirts. Final issues prior to closing need to be ironed out such as the BRV's due diligence of EDC, review and acceptance of financial statements, and the mechanism by which minority shareholders will be paid. Gluski put the odds of the deal going ahead as planned at 90 percent. Gluski expected that the ceremony would avoid "gringo bashing" (which it did, both parties expressed their contentment with the fairness of the deal). He added that moving forward, the BRV may mobilize EDC's unions to trash the company at some point in the future, but that the signing ceremony was not the moment. ¶7. (C) AES negotiations gave Gluski a rare outsider's look into the dynamics of internal BRV politics. Gluski told us that Vice President Rodriguez was unhappy with the negotiation process to the point that he considered not attending the signing ceremony. Ramirez is used to picking up the phone and reporting directly to Chavez and does not like having to go through Rodriguez. Rodriguez plays the role of the Chief Operating Officer of the BRV and was described by Gluski as a person who needs to be in control at all times. In contrast to Rodriguez' predecessor, Jose Vicente Rangel, who was powerless to control Ramirez, the new Vice President appears determined to put a centralized command structure in place. -------------- BRV Motivations for Nationalization -------------- ¶8. (C) In Gluski's view, nationalizing EDC is motivated by "kleptocracy" more than socialism. He contrasted nationalizing EDC with CANTV; Chavez genuinely thinks CANTV is a strategic asset and has a strong animosity against CANTV President Gustavo Roosen. With respect to EDC, he opined that Chavez' cronies wanted to get their hands on a company that has been a cash cow. Gluski thought that the BRV would directly control approximately 85 percent of EDC and allow Venezuelan investors to hold the remaining 15 percent of shares. Gluski speculated that this 15 percent could be distributed as patronage to loyal Chavistas. He asserted that EDC had been a model for good corporate governance and transparency and estimated that in six months, the BRV would run the company into the ground. -------------- Comment -------------- ¶9. (C) AES read the writing on the wall and is ready to take a good deal from the BRV and move on, after six profitable years in Venezuela. Both sides can walk away from this deal with their heads high. AES leaves with its reputation intact and fair value for its investment. The BRV can tout the February 8 signing ceremony as a major success in its nationalization campaign. The BRV's negotiation strategy with AES showed that it understands that the international community, and the United States, in particular, will hold the BRV to respecting international standards of compensation. This deal is also a possible explanation to the large amounts of debt PDVSA has recently incurred. Last week, PDVSA and BNP PARIBAS closed a USD 1 billion revolving credit facility and PDVSA has announced that it will issue CARACAS 00000302 003 OF 003 USD 3.5 billion in bonds (septel). PDVSA may be taking on debt to finance the BRV's nationalization campaign. BROWNFIELD