VZCZCXYZ0001
OO RUEHWEB
DE RUEHBU #1352/01 1962237
ZNY CCCCC ZZH
O 152237Z JUL 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8638
INFO RUEHAC/AMEMBASSY ASUNCION PRIORITY 6352
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C O N F I D E N T I A L BUENOS AIRES 001352
SIPDIS
SIPDIS
WHA FOR WHA/BSC AND WHA/EPSC
E FOR THOMAS PIERCE
EB/CBA FOR FMERMOUD
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE
EX-IM BANK FOR MICHELE WILKINS
OPIC FOR GEORGE SCHULTZ AND RUTH ANN NICASTRI
PASS USTR FOR MARY SULLIVAN
USDOC FOR ALEXANDER PEACHER AND JOHN ANDERSEN
TREASURY FOR LTRAN
USCINCSO FOR POLAD
E.O. 12958: DECL: 07/12/2017
TAGS: ECON EINV ENRG BEXP VZ AR
SUBJECT: (C) GOA FOILS ETON PARK INVESTMENT BID: CORRUPTION
AND ECONOMIC NATIONALISM ALLEGED
REF: A. BUENOS AIRES 85
B. BUENOS AIRES 978
C. BUENOS AIRES 844
D. BUENOS AIRES 1278
E. BUENOS AIREDS 65
F. BUENOS AIRES 1128
Classified By: Ambassador E.A. Wayne. Reasons 1.5 (B,D)
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Summary
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1. (C) Major U.S. investment fund Eton Park's two year effort
to buy a minority stake in Argentina's regulated electricity
transmission grid from Brazil's Petrobras offers a snapshot
of GoA machinations to favor local -- and presumably more
easily controlled -- capital investment in strategic assets.
It also offers insight into how less than transparent
mechanisms have reportedly been used by the GoA Planning
Ministry to reward friends and allies of the Kirchner
administration. Eton Park officials outlined to Ambassador
their legal efforts to overturn the GoA's February 2007
rejection of Eton Park's bid in favor of a competing joint
bid by Electro Ingeneria, an Argentine construction company
close to the Kirchner administration, and a state-owned
energy company. The GoA claims that Eton Park had neither
experience in the sector nor the long-term commitment
required to run a public service company effectively.
2. (C) Eton Park alleges that Planning Minister Julio De Vido
stands to directly benefit from Electro Ingeneria being
selected and so he interfered to stymie Eton Park's efforts
to have its bid reconsidered. Eton Park also alleges that
ABN-AMRO bank agreed - at the behest of Venezuelan President
Chavez and against the bank's better judgment - to fund a
loan to support Electro Ingeneria's counter-offer. According
to Eton Park, Chavez made this financing a quid pro quo for
ABN to continue to do business with the GoV. Eton Park is
currently considering an appeal to the Argentine Supreme
Court. Other sources tell us that, irrespective of whatever
corruption may be involved, top GoA officials want national
businessmen to control key economic sectors and that, had
Eton Park played its cards a bit differently, it might have
been allowed to be a major shareholder in an ""Argentine""
appearing entity. End Summary.
--------------------------------------------- --
GoA Forces Petrobras to Divest Transener Stake
--------------------------------------------- --
3. (SBU) Ambassador met July 10 with Dirk Donath, New
York-based Managing Director of U.S. investment fund Eton
Park and with Federico Ravazzani, local Eton Park
representative and head of Buenos Aires-based Pent Capital,
to review the state-of-play of Eton Park's efforts to
purchase a minority 26% stake in Argentina's regulated
national electricity transmission grid from Brazil's
Petrobras.
4. (U) In 2003 Petrobras acquired Pecom Energa from the
Perez Companc Group, becoming the second largest oil producer
in Argentina. One of the numerous Argentine energy sector
assets held by Pecom Energia was its 50% stake in Compania
Inversora en Transmisin Electrica (""Citelec""), the
controlling 52% shareholder in Argentina's electricity
transmission company Compana de Transporte de Energia
Elctrica S.A. (""Transener""). Due to antitrust
considerations, GoA authorities ordered Petrobras to divest
its interests in Transener and other electricity transmission
companies. In September 2005, Eton Park Capital Management
began discussions with Petrobras to acquire its 50% equity
stake in Citelec and a 20% stake in Yacylec.
5. (U) Transener is Argentina's largest electricity
transmission company (95% market share) which also controls
Transba (electricity transmission in the province of Buenos
Aires) and Transener International (a foreign subsidiary
conducting non-regulated electricity transmission businesses
in Brazil, Uruguay, Peru, Paraguay and Panama). Yacylec is
an Argentine company responsible for the operation and
maintenance of 281 km of electric lines between the Yacyret
Hydroelectric Power Station (Corrientes province) and
Resistencia (Chaco province).
---------------------------------------------
Eton Park Agrees to Purchase Petrobras' Stake
---------------------------------------------
6. (U) Eton Park, one of the world's largest investment funds
with over $5 billion under management, is managed by a group
of former Goldman Sachs partners headed by Eric Mindich. The
fund acquired significant investments in power and utilities
elsewhere in Latin America through its purchase of a stake in
Prisma, the company that acquired Enron,s international
portfolio from Enron,s creditors in early 2006.
7. (U) In August 2006, Eton Park and Petrobras agreed on
terms and conditions for Eton Park to acquire Petrobras'
entire stake in Transener and signed a stock purchase
agreement for Eton Park to pay $54 million for the Citelec
shares and $6 million for the Yacylec shares. Eton Park made
a $12 million, 20% down-payment to Petrobras with the stock
purchase agreement to become effective once regulatory
approval was granted by the GoA's electricity regulator, the
Ente Nacional Regulador de la Electricidad (ENRE); by the GoA
Ministry of Economy's Secretary of Energy Daniel Cameron; and
by the GoA's anti-trust body, the Comision Nacional de
Defensa de la Competencia (CNDC).
--------------------------------------------
GoA: Maintaining Argentine Operating Control
--------------------------------------------
8. (SBU) Petrobras' local partner in Transener was Pampa
Holdings (formerly the Dolphin Group), an Argentine-managed
investment fund controlled by prominent entrepreneur Marcelo
Mindlin. Eton Park's Donath estimates that 90-95% of Pampa's
capital is, in fact, held by U.S. and European investors,
with Eton Park itself one of Pampa Holding's three largest
investors. Pampa and Eton Park were to share control of
Transener once the Eton Park acquisition won regulatory
approval. To address GoA concerns about maintaining
Argentine operating control of the entity, Eton Park had
granted Pampa the right to name the President and CEO of
Transener. According to Eton Park, Pampa had developed a
close working relationship with Eton Park, was supportive of
Eton Park,s acquisition of the Petrobras stake in Transener,
and had made this known to Planning Minister De Vido and to
President Kirchner on several occasions.
9. (C) By September 2006, Eton Park had presented all
required documentation to GoA regulatory agencies involved.
According to Eton Park, both the Energy Secretary and the
CNDC had told them unofficially that they had no objection to
the transaction going forward. Eton Park then met numerous
times with ENRE officials and also held private meetings with
President Kirchner and with Minister De Vido during September
2006 UNGA meetings in New York, and again with Minister De
Vido November 17 in Buenos Aires. At that last meeting, Eton
Park reported De Vido confirmed there were no/no GoA
objections to the transaction and that he believed all
regulatory approvals would be forthcoming shortly.
--------------------------------------------- --
GoA 180: Electro-Ingeneria as National Champion
--------------------------------------------- --
10. (C) During January 2007 conversations with EconCouns,
Eton Park expressed concern at ongoing delays in regulatory
approval and market rumors that Planning Minister De Vido had
decided -- late in the game -- to go back on his earlier
assurances to Eton Park and instead favor a rival bid for
Petrobras' stake in Transener by Cordoba-based construction
company Electro Ingeneria (EI). Eton Park noted that EI's
book of public infrastructure project business, including the
construction of electricity transmission lines for Transener,
had had grown dramatically during the Kirchner
administration; that De Vido's son worked for EI, and that De
Vido himself likely had a ""personal stake"" in EI's success.
Eton Park also noted that EI principal Gerardo Luis Ferreyra
was an ex-Montonero guerilla who, during the 1976-82 military
dictatorship, had shared a cell with current Presidential
Legal and Technical Secretary (and close confidant) Carlos
Zanini. Eton Park noted that Ferreyra had accompanied De
Vido (along with other Argentine businessmen) to Germany in
January 2007 and they believe that, during that trip, the
decision was taken to give the deal to EI.
11. (C) Ambassador Met January 15 with Planning Minister De
Vido to raise a number of U.S. company advocacy issues,
including Eton Park (Ref A). When Ambassador noted Eton
Park's concerns over ongoing delays in regulatory approval,
De Vido replied that he understood Petrobras was still in the
process of accepting bids from potential buyers. Eton Park
later confirmed that De Vido was well aware that Eton Park
had signed a binding stock purchase agreement with Petrobras
months earlier. At Eton Park's request, an advocacy letter
from Ambassador to De Vido was sent in late January 2007
noting that final GoA approval of Eton Park,s investment in
Transener would be seen as a positive signal by the GoA to
the institutional investment community in the United States.
The letter also noted that, at a time when Argentina was
seeking expanded foreign direct investment in strategic
sectors related to infrastructure and energy, Eton Park,s
interest should be welcome.
12. (SBU) On January 29, Argentina's largest daily, Clarin,
reported that the GoA was considering rejecting the sale of
Transener to Eton Park in favor of a new competing joint bid
by Electro Ingeneria and recently formed state-owned energy
company ENARSA. On February 8, President Kirchner reacted
angrily to follow-on press reports in Clarin of the existence
(but not the text) of the Ambassador's advocacy letter on
behalf of ""a U.S. company."" Kirchner stated that his
administration was transparent and that Argentina was not a
""banana republic"" that could be pushed into making decisions.
On February 9, the CNDC officially rejected Eton Park's bid,
claiming that it had neither ""roots"" nor experience in the
sector and that, as an investment fund, it did not have the
long-term commitment required to run a public service company
effectively. Local media interpreted the President's
statement and the subsequent CNDC opinion as a GoA effort to
retain national control of a strategic energy sector. Media
also noted that the Electro Ingeneria/ENARSA consortium would
have to seek public or private sector funding in order to
match Eton Park's bid.
13. (C) Eton Park appealed the CNDC ruling in March 2007 to
the Argentine Civil and Commercial Appeals Court, confiding
to EconCouns that its legal counsel considered the CNDC's
ruling weak and easily overturned. However on June 22, the
3-judge appeals court rejected Eton Park's appeal, opening
the way for Electro Ingeneria's bid to go forward. The
Appeals court judge ruled that the GoA had ""complied with its
duty to safeguard the public interest,"" and also argued that
Eton Park had not demonstrated sufficiently that it had
electricity sector experience.
-------------------------------
(C) Eton Park Alleges Foul Play
-------------------------------
14. (C) In a July 10 meeting with the Ambassador, Eton Park
principals noted that they had heard from reliable sources
that an Argentine Appeals Court ruling favorable to Eton Park
was originally to have been issued in early June. With this
same information, Eton Park alleged, Electro Ingeneria filed
for a two week stay that permitted Planning Minister De Vido
sufficient time to have the Appeals Court ruling re-written.
Some in the GoA had been able to influence Appeals Court
judges, Eton Park alleged, by threatening to publish recorded
phone conversations that would have been embarrassing to some
or all of the judges on the appeals panel.
15. (C) Earlier in May, confident that the Appeals ruling
would be favorable, Eton Park had floated a proposal to the
GoA to address its concerns about keeping Transener under
""national control"": Eton Park had approached Gerardo
Wertheim, principal of the prominent Argentine Wertheim
family group that has substantial interests in Argentine
financial services, natural gas transportation infrastructure
and paper mills. To provide a local face to the transaction,
the Wertheim group agreed to hold a 51% voting share in an
Eton Park/Wertheim partnership, while Eton Park provided 80%
of the investment capital. Eton Park principals called the
proposed Transener ownership of 50% Werthiem /Eton Park and
50% Pampa Holdings a ""dream team"" that was well received in
informal discussions they held with both Chief of Cabinet
Minister Fernandez and Legal and Technical Secretary Zanini
in late May. According to Eton Park principals, Fernandez
took the Eton Park proposal to President Kirchner, who then
consulted with Planning Minister De Vido. De Vido allegedly
told the President that backtracking on the GoA's original
decision would make the President look bad.
--------------------------------------------- --
(C) GoV Pushes ABN to Finance Electro Ingeneria
--------------------------------------------- --
16. (C) The difficulty that an Electro Ingeneria /ENARSA
partnership faced in obtaining private funding for its
proposal to match Eton Park's bid -- or the need to seek
financing from state-owned bank -- was long seen by analysts
and media as the Achilles heel of this group's joint bid.
Eton Park principals said that the Jorge Britto, President of
Banco Macro (a fast growing private Argentine bank close to
the GoA) had told them the some in the GoA were pushing
""allied"" private banks to fund the deal. Eton Park
principals noted that ABN-AMRO bank had decided to fund a $60
million bridge loan to support the deal and that, according
to ABN loan officers they spoke with, ABN's funding of this
deal was against the bank's better judgment but done at the
behest of Venezuelan President Chavez who made this deal a
quid pro quo for ABN continue to do business with the GoV.
----------------------
Eton Park: Next Steps
----------------------
17. (C) Confessing that the saga of their attempt to purchase
a stake in Transener was ""worthy of a cheap novel,"" Eton Park
principals told Ambassador they are not ready to give up.
Still confident that the Appeals court ruling is
fundamentally flawed, Eton Park is considering appealing the
adverse ruling to the Supreme Court. They admitted that Eton
Park's position was weakened somewhat by the June 29 expiry
of their purchase contract with Petrobras, but noted that
Eton Park has declined to take back its $12 million deposit
from Petrobras to maintain its claim. Eton Park also noted
the possibility of local media investigative reports on the
transaction coming out soon. In the current scandal-ridden
political environment, Eton Park suggested, such media
attention could push the GoA to again reverse course.
--------------------------------------------- ---
(C) Comment: Corruption and Economic Nationalism
--------------------------------------------- ---
18. (C) Minister De Vido's Planning Ministry has increasingly
concentrated control over GoA authorization and funding of
major domestic energy and transportation infrastructure
projects. The Planning Ministry also controls rapidly
expanding GoA subsidy payments to public service providers in
the energy and transportation sectors. The
less-than-transparent mechanisms used by the GoA to award
infrastructure projects and to distribute subsidy payments,
along with high profile and persistent media attention to a
number of procurement and financing scandals (including the
ongoing Skanka gas pipeline scandal that post has reported on
extensively, Refs B and C), have fed public perceptions that
some senior members of President Kirchner's self-described
""manos limpios"" (clean hands) administration are corrupt.
The rapid rise of Electro Ingeneria as a GoA contractor
during the Kirchner administration and the GoA's dogged
backing of its bid to buy Transener appear to support Eton
Park allegations of Planning Ministry interference. However,
Embassy stresses that its information of apparent
irregularities is based on hearsay information provided by
Eton Park.
19. (C) The Eton Park case can also be explained as one of a
growing number of GoA efforts to ensure that strategic
national assets remain in Argentine hands. Recent examples
include the GoA's state-owned bank financing of a debt
re-financing package for Cotos Supermarket in the face of a
foreign buy-out offer; the Venezuela-financed rescue package
of Argentina's emblematic San Cor Dairy Cooperative in the
face of a U.S. Soros Group buy out proposal; and the GoA's
current support for the local Eskenazi/Peterson group's
efforts to buy a 25% stake in Spanish-owned Argentine energy
giant Repsol-YPF (Ref D).
20. (C) Billions in international arbitration claims filed by
foreign multinationals in the wake of Argentina's 2001/2
economic collapse are still outstanding (Refs E and F), an
object lesson for a Kirchner administration that sees foreign
control of key national assets as limiting its ability to
mold national economic policy. One prominent energy
businessman told us recently that, had Eton Park not tried to
structure its deal as it did and rather prepared initially to
buy a stake in a clearly Argentine-led entity, he deal may
well have proceeded without objections. He cited other more
successful infusions of foreign capital from multinationals
whose local operations are led by Argentine CEOs. He said
the current administration clearly wants to rely more on a
""national bourgeoisie"" in strategic sectors like energy
transmission. Similarly, parliamentarians aligned with
Kirchner's Victory Front have recently introduced legislation
to limit the ability of foreign ""vulture"" investment funds to
invest in Argentine assets. Kirchner's economic nationalism
seems to play well with his populist support base, which
blames foreign interference in Argentina's economy for the
2001 economic crash and trumpets Argentina's paydown of IMF
outstandings as ensuring the nation remains firmly in control
of its own economic destiny.
WAYNE
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