Brazil on Wednesday vowed to investigate allegations U.S. energy firm AES Corp. struck a deal with Enron that allowed it to snap up a top local power distributor in 1998 at a giveaway price.
The Financial Times reported AES convinced Enron not to bid for Eletropaulo Metropolitana -- Latin America's biggest power distributor in revenue terms -- on the eve of its privatization auction in exchange for some lucrative contracts.
The newspaper did note cite the source of the allegations.
Analysts and officials said that, true or not, the report of a "dirty privatization" is welcome news for the government- run National Development Bank, or BNDES, which is trying to seize Eletropaulo from AES over debt nonpayments.
"It really reinforces our position in the case," said a source in the bank who asked not to be named.
AES (NYSE:AES) stock slumped about 5 percent to below $7 in afternoon trading Wednesday, with analysts attributing the fall to "bad headline risk," even though company officials denied any wrongdoing. Eletropaulo shares fell 1.2 percent on the Sao Paulo Stock Exchange, even as the overall market rose.
In the capital, Brasilia, Energy Minister Dilma Rousseff said the case required investigation.
"If there was wrongdoing, measures have to be taken. We have to see if the case damaged the country, to what extent and what viable legal measures can be taken," she told reporters.
Analysts said that, while an investigation may take years and prove nothing, the psychological effect was likely to dent the U.S. company's chances of retaining control of Eletropaulo.
"It's that last drop that makes water spill from a full cup," said Adriano Pires, head of the Brazilian Center for Infrastructure. "It should justify whatever tough action the BNDES and the government may take against AES over debt."
The BNDES has announced plans to take the controlling package in Eletropaulo to the auction block, though acknowledging the litigation with AES may last years. On Tuesday, it threw out an AES proposal that the bank said did not envisage payment of old dues.
Virginia-based AES, which bought Eletropaulo for about $1.8 billion in 1998, has defaulted on over $400 million in debt payments to the BNDES. It owes the bank about $1.2 billion.
In practical terms, however, AES is unlikely to suffer any further impact as five years have passed since the deal, which is the legal deadline for appeals against the privatization.
"So in theory they should be outside of any economic or financial consequences ... And it does not appear that any other lawsuit could be used to come after them whether it is in the U.S. or Brazil," said Lasan Johong, New York-based analyst with Blaylock & Partners.
An Enron Corp. (Other OTC:ENRNQ.PK) spokesman said the now bankrupt energy giant was approached by a consortium, in which AES held a 15 percent stake, "to do a deal" in 1998.
Enron first accepted the deal based on the advice of outside counsel, the spokesman said, but "rescinded the deal and took no benefit from it" later after judging the advice was "inaccurate." Enron was not conducting an investigation into the charges, he said.
AES's status as a member of a consortium should also protect the company in an investigation as the deal was a subsidiary level, analysts said. They also noted Brazilian privatizations have a history of rigging claims that have remained unanswered.
(Additional reporting by Nicola Groom in New York)
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