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Cablegate: (C) Goa Foils Eton Park Investment Bid: Corruption

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DE RUEHBU #1352/01 1962237
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O 152237Z JUL 07
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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)


-------

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


=======================CABLE ENDS============================

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