Eike Batista, who lost the title of Brazil's richest man as his fortune shrank by two-thirds in the past year, agreed to sell a stake in power company MPX Energia SA to Germany's E.ON SE for about 2.1-billion reais ($1-billion U.S.).
Mr. Batista will surrender 24.5 per cent of MPX, almost half his stake, under terms the Brazilian company laid out in a security filing Thursday. E.ON, which is seeking opportunities outside the mature European energy market, will triple its stake in MPX, which generates electricity from coal and natural gas.
E.ON's investment will provide a quarter of a 1.2-billion reais ($596-million) capital increase planned for later this year through a public sale of stock. It will pay Mr. Batista 10 to 11 reais per share of MPX. When complete, E.ON will own a little more than 36 per cent of MPX. It bought 11.5 per cent of the company in January 2012 and later raised it to 11.7 per cent.
"We believe that E.ON's experience in building and executing power plants and similar infrastructure will help us materialize our vision of becoming one of Brazil's largest energy companies in coming years," MPX chief executive Eduardo Karrer told investors in a conference call to discuss the deal.
The deal is expected to be the first of several for Mr. Batista and the oil, mining, energy, port and shipbuilding companies controlled by his Rio de Janeiro-based Grupo EBX. Investors have voiced concern that his stable of startup companies were behind schedule, running out of finances and failing to deliver promised returns.
The companies' stock prices dropped an average of 70 per cent over the past year, shaving nearly $20-billion off Mr. Batista's fortune. Up until Thursday's announcement, Mr. Batista owned 54 per cent of MPX.
"We see with good eyes the decentralization of control and decision-making processes" at MPX, said Lilyanna Yang, a senior energy analyst with UBS Securities in New York.
To help EBX downsize, Mr. Batista turned earlier this month to BTG Pactual Group, Brazil's largest independent investment bank. The bank and its founder and CEO Andre Esteves are spearheading efforts to streamline Mr. Batista's businesses and raise new money for his capital-intensive projects.
Proceeds from MPX's share sale will go to finance power plant investments and not be used to pay debt, Mr. Karrer added. State development lender BNDES, which owns about 10.3 per cent of MPX, said in a statement that is considering taking part in the plan.
Some analysts questioned the wisdom of E.ON's purchase. Brazil's electricity industry is going through one of its most traumatic periods since a brush with power rationing in 2001. Government moves to cut and control power prices have saddled many generators with losses after the government granted early renewal of expiring hydro-dam rights in exchange for price cuts.
Shares of MPX gave up gains in Sao Paulo and fell 2.7 per cent in late afternoon trading. The stock is down more than 15 per cent this year and is on track for its lowest close in 18 months.
E.ON rose 1.3 per cent to €13.62 on the Frankfurt-based Xetra exchange, its first gain in four days.
Centrais Eletricas Brasileiras SA, the state-led utility known as Eletrobras, lost a net 10.9-billion reais in the fourth quarter. Research group Economatica pegged that as Brazil's largest-ever corporate quarterly loss.
The government is also moving to change rules in the power market after a lack of rain left hydro reservoirs dry, forcing the use of more expensive thermal power.
"The stake in MPX is cheap, and Brazil has good long-term prospects, but the market here is full of surprises," said Edmilson Moutinho dos Santos, an energy policy researcher at the University of Sao Paulo's Eletrotechnical Institute.
"E.ON is taking a risk because this is a very complicated market, one where even President Dilma Rousseff is not willing to stick to the electricity system rules she drafted herself when she was energy minister," he said.
While E.ON seeks to double contributions from non-European markets to its profit, it has no intention of taking a majority stake in MPX, chief financial officer Marcus Schenck said in an interview on Thursday.
"In the second half of the decade, we want to generate more than 25 per cent of our net income in markets outside of Europe. That would be roughly twice as much compared to now," Mr. Schenck said.
MPX, though, is less risky than it once was, Mr. dos Santos said. His long-term confidence in Batista's companies is such that he has recently invested his own money in OGX Petroleo e Gas Participacoes SA, the EBX oil company that develops natural gas in partnership with MPX.
One reason for optimism, he said, is that MPX's first power plants have started operating after long delays.
Some of them will ramp up to commercial output levels in the next few weeks, J.P. Morgan Securities analyst Gabriel Sala said in a report. That will make the company's portfolio much more attractive than development projects, he said.
Fresh capital is seen as key to helping MPX finance about 600-million reais of generation plant investment that will transform it from a startup to a fully operating power company.
UBS's Mr. Yang said the deal, however, should address concerns that MPX would be unable to refinance about 925-million reais in short-term debt that was raised to finance the building of power plants.
Some of the funds propping up the company's capital structure will help MPX participate in a round of energy auctions that may take place between July and August, executives on the call said.
Other efforts to kick-start Mr. Batista's troubled empire, including widespread changes in management, have failed to regain investor confidence.
"Even though we acknowledge the attractiveness of the Brazilian power generation market and we consider positive the fact that E.ON was able to retain its local partner on board, from our point of view the risks for E.ON increased remarkably, especially since Eike Batista is not a guarantee for economic success any more," said Marc Nettelbeck, an analyst at DZ Bank in Frankfurt.
Mr. Karrer will continue as the company's CEO, officials said on the conference call.
"An accord has been reached between Eike and E.ON to name the board," Mr. Karrer said. "We are going to extend many of the things that we had in mind with this deal. … What we will focus is on a better execution."