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Cemig-Parati Acquires Redentor

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Companhia Energetica de Minas Gerais (CIG - Free Report) , also known as CEMIG recently announced that its affiliate company, Parati S.A. (Participacoes em Ativos de Energia Eletrica) acquired significant interest in Redentor Energia S.A. (Redentor), from Fundo de Investimento em Participacoes PCP.

Parati acquired approximately 58.7 million shares, or 54.08% interest of Redentor for roughly R$403.4 million, or R$6.874712 per share. This will likely to follow a public offer by Parati to acquire the remaining shares of Redentor.

CEMIG is one of the largest integrated electric utilities in Brazil. It has more than 6,896 megawatts of installed generation capacity, deriving approximately 97% from hydroelectric power.

We believe the company stands at an advantageous position to benefit from the economic recovery in Brazil. Demand for electricity in the country is on the rise and is expected to get a boost as the country will host two major sporting events in the coming years.

Over the long term, the company targets to achieve 20% market share in the various segments of the electricity market. Investments in fiscal year 2011 and 2012 are anticipated to be approximately R$2.3 billion and R$1.1 billion, respectively.

In spite of all these positive features, the strange rule from ANEEL and interference from the state government tend to be problematic. In addition, the company faces competitive pressures in the Brazilian market, especially from its peer Companhia Paranaense de Energia . Moreover, heavy dependence on natural water resources for top-line growth is risky.

Considering all these factors, we anticipate the company to perform in line with the market going forward and thus maintain a Neutral recommendation on the stock.

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