Why Centrais Eletricas Brasileiras SA Stock Dropped 12% Today

What happened

Centrais Eletricas Brasileiras SA (NYSE: EBR) stock crashed 11.6% in Wednesday trading, closing at $4.43 per share after Reuters reported that the Brazilian government has removed from its 2018 budget any mention of revenue anticipated to come from the privatization of the government's stake in the power utility.

The government had reportedly hoped to reap $3.3 billion from the sale of its stake.

So what

Why would this push the stock price down? That's a bit difficult to parse.

According to data from S&P Global Market Intelligence, the Brazilian government currently owns more than 44% of Centrais Eletricas Brasileiras shares outstanding, with the balance publicly traded by institutions and pension, venture capital, and private equity funds. Putting those state-owned shares on the market, one imagines, would ordinarily push the share price down (by increasing supply on presumably static demand).

On the other hand, freeing up those shares for trading would also boost liquidity of the stock, potentially making Centrais Eletricas Brasileiras more attractive to investors. Getting the state out of the business might also be expected to encourage Centrais Eletricas Brasileiras to focus more on earning profits and less on keeping the citizenry happy with low utility rates. (Centrais Eletricas Brasileiras is currently unprofitable, and has lost money in four of the past five years).

Now what

Privatization could still happen, of course. Removing the expected revenue from privatization from the 2018 budget doesn't mean that it is off the table -- if not this year, then perhaps it could happen next year, or even the year after that.

For the time being, however, and for whatever reason, investors are viewing this expected delay as a negative for the stock.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.