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UPDATE 2-Brazil sees Eletrobras privatization boosting sector, shares soar

(Adds EDP comments, updates share performance throughout)

BRASILIA/RIO DE JANEIRO, Aug 22 (Reuters) - Brazil's plan to privatize power holding company Centrais Elétricas Brasileiras SA could help lure investment into the industry rather than simply help cut the budget deficit, officials said on Tuesday as the move sparked a surge in shares of state-controlled firms.

The transaction should be concluded by mid-2018, and could involve the sale of new shares to help replenish the capital of the utility known as Eletrobras, Mines and Energy Minister Fernando Coelho Filho said in an interview.

While the plan envisages the federal government exiting voting control of Eletrobras, it remains to be decided how much of its 51-percent stake will be sold and how it will be done, deputy Finance Minister Eduardo Guardia told reporters on Tuesday.

Their comments underscore President Michel Temer's rush to sell state assets and trim the size of Brazil's bloated state before leaving office in December 2018. Common shares in Eletrobras soared as much as 51 percent on Tuesday, their biggest daily gain in more than 24 years.

Class B preferred shares, the company's most widely-traded class of stock, rose as much as 28 percent - the biggest intraday gain since Jan. 1999. American depositary receipts, which trade in tandem with common shares, were up 46 percent in mid-afternoon trading in New York.

Rivals, including the Brazilian units of EDP Energias de Portugal SA and Engie SA, said industry players will remain attentive to terms of the transaction, noting that they would be interested in some Eletrobras assets.

"Our duty is to analyze all the opportunities that this transaction could bring about," EDP Chief Executive Officer Miguel Setas told reporters in São Paulo.

Investors said the Eletrobras plan stoked expectations that Temer remains committed to shrinking the role of the state in the economy, regardless of political resistance to his administration.

"The possibility that this could be extended to other state companies is growing, which is good for fiscal and market reasons," said Victor Carvalho, a partner at fund manager LAIC-HFM in São Paulo.

According to Coelho Filho, Eletrobras's privatization could raise up to 20 billion reais ($6.3 billion). The federal government will remain a shareholder and reserve the right to veto some strategic decisions, the government said late on Monday.

Analysts said that, while the privatization plan faces legal challenges and potential opposition from opposition parties, civil servants and trade unions, it could benefit the industry by luring long-term investment, and enhance transparency in a sector long hobbled by inefficiency and corruption.

"Eletrobras has historically operated under the political influence of various political figures who may not be so enthusiastic about the company's privatization," analysts at Itaú BBA wrote in a client note.

STATE FIRMS

As a result, Brazil's benchmark Bovespa stock index touched the 70,000-point mark for the first time in almost seven years. Gains were mainly led by state-controlled Banco do Brasil SA and Petróleo Brasileiro SA - which rose as much as 5 percent and 4 percent, respectively.

Other state power firms rose, led by debt-laden Cia Energetica de Minas Gerais SA. Reuters has reported this year on efforts by the company, known as Cemig, to dispose of assets to repay 4 billion reais in maturing debt over the next 12 months.

Brazil's Mining and Energy Ministry compared the Eletrobras proposal to successful privatizations of planemaker Embraer SA in 2006 and the dissolution of Vale SA's controlling bloc earlier this year.

Yet for many Brazilians, the earlier privatizations of the 1990s were marred by allegations of corruption. The subject remains politically fraught even as the government has put airports, highways and ports up for sale in recent years.

A protest briefly interrupted the government news conference on Tuesday, highlighting likely resistance from Brazil's opposition parties and powerful unions.

The proposal will be formally presented to the council of the government's Investment Partnership Program on Wednesday.

As part of the privatization process, Eletrobras may spin off a nuclear power unit and the Itaipu hydroelectric dam, a joint venture with Paraguay. The privatization could generate at least 40 billion reais in value for Eletrobras through cost-cutting and downsizing, the Itaú analysts said.

The value of Eletrobras' equity stood at 31 billion reais at the end of May, according to the company's website. Brazil's federal government owns 51 percent voting shares, equal to 41 percent of the company's equity. State development bank BNDES also owns about 20 percent of common shares and 14 percent of preferred shares.

($1 = 3.16 reais)

(Reporting by Leonardo Goy in Brasilia and Rodrigo Viga Gaier in Rio de Janeiro, Additional reporting by Luciano Costa in Sao Paulo; Writing by Brad Haynes and Guillermo Parra-Bernal; Editing by W Simon and Nick Zieminski)