Pouncing on Perez

In July, Brazil’s national oil company Petrobras bought a majority stake in Pecom Energía, Argentina’s largest independent oil, gas and power company. Petrobras is paying Pérez Companc, the family-owned group that controls the company, $755 million in cash and issuing them a $371 million note for a 59% stake in Pecom. But Petrobras shareholders hated the idea and a sell-off drove down its share price 7%, wiping $1.32 billion off its market capitalization in a few days. The company’s stock has continued to sink, hit by the country’s financial crisis.

Francisco Gros, the imperturbable president of Petrobras, says he is not worried. “We are caught in the middle of a crossfire and people are right to be worried,” he says. “But like all deals, you have to make it work. We did this because it was a deal you can’t refuse. But in general, this is not the time to go on an acquisition binge and instead, look after business.” The deal values Pecom at $1.91 billion. At the beginning of last year, the company had a market capitalization of $3.3 billion. The deal increases Petrobras’ production by 13%, to around 1.8 million barrels of oil equivalent (BOE) per day. The acquisition boosts Petrobras’ proven reserves by one billion BOE to 10.3 billion BOE.

Talks between Petrobras and Pérez Companc had been going on and off for years. But with January’s devaluation, the talks took on a new urgency. In January 2001, Pecom had a leverage ratio of 77%. In March 2002, leverage was 308%. Petrobras, advised by Goldman Sachs, and Pérez Companc, working with Merrill Lynch, soon reached agreement. However, the deal is contingent on Pecom renegotiating its estimated $1.95 billion debts. Prior to closing the deal, it announced a $997.5 million distressed debt exchange.

Yet with markets crumbling, investors and analysts like the acquisition even less than before. To begin with, they reason, buying Pecom has increased Petrobras’s leverage by increasing its debt by a net $3.1 billion thanks to the consolidation of Pecom’s balance sheet. With a 62% debt ratio prior to the acquisition, Petrobras was already more leveraged than many of its competitors.

Others accuse Gros – a former Morgan Stanley investment banker and president of the BNDES development bank who took over at Petrobras in January – of overpaying for Pecom by agreeing to a 39% premium for the company’s non-exploration and production assets. Petrobras wants to sell these assets, but it is likely to take a long time. Analysts assign no value to these assets and calculate that Petrobras has acquired Pecom’s proven reserves at a price of $4 per BOE, 45% higher than they are worth.

Gros says he is continuing with plans to buy Santa Fe, a small Argentine oil independent. “We are trying to complete the talks with Santa Fe and after that we are trying to look at the possibilities of buying a southern US refinery.” He adds that, “There is a constant risk aversion in the emerging markets asset class. Petrobras is one of the less risky companies. I’m not having any problem renewing [credit] lines and I don’t believe that crises last forever.” Perhaps, but investors had hoped that Petrobras would invest in the US to reduce its risk profile at a time when Brazil is in turmoil.

To keep a lid on inflation, Brazilian President Fernando Henrique Cardoso has threatened to reimpose price controls on Petrobras, less than a year after liberalizing prices, and so help José Serra, the government’s struggling presidential candidate. This has led to concern that the next government will roll back Cardoso’s liberalization policies. “I am not managing the company with a disaster scenario in mind,” says Gros. “Our biggest problem would be a drop in the oil prices. This is a revenue-raising machine for the government. I doubt that anyone would do anything destructive to Petrobras. That would kill the goose that lays the golden egg.” n