Latin Finance - November/December 2010 - 83

petrobras

“The government is showing their way of behaving and how they see the economic world. They want to have national winners and they want to control them somehow,” says Marcos Duarte, owner of Polo Capital, a hedge fund based in Rio de Janeiro with approximately $1.4 billion under management, and a primary focus on equity and corporate debt markets in LatAm. “[The government] did this whole capital increase because they want to increase their share.”

Yang and Duarte say that the barrel price was too high, and that most sensible Novo Mercado and Petrobras investors would have been able to invest Earlier this decade, when equity activity in projects with higher returns with that was relatively dry in Brazil, the capital. Most private companies BM&FBovespa introduced a would have offered higher Petrobras Equity Versus Bovespa separate listing category, the returns on investments in the Underperforming the index novo mercado. In order to join pre-salt reserves, they add. this category, companies must “What [the government] 45 80,000 issue only voting shares, offer really did was sold a project with 100% tag-along rights and rate of return of 8.82%,” says 70,000 maintain a free float of at least 40 Duarte. “I doubt any offshore 60,000 25%, among other rules which company would be willing to aim to guarantee transparency. invest in such a risky project 50,000 35 These reforms, among with those kinds of odds . . . others, helped rejuvenate 40,000 [competitors] Shell, Eike Batista capital markets in Brazil. The and others would be willing 30 30,000 Bovespa Index exchange is now the world’s to sell the project at least 400 third-largest by market value. basis points wider than that,” he Ordinary Share 20,000 25 Companies participating in adds. “This kind of business, if Preferred Share 10,000 special corporate governance you put it on balance for the risk levels represent 68.7% of market involved, usually, I pretty much 20 0 capitalization, 77.5% of financial Dec-2009 Feb-2010 Apr-2010 Jun-2010 Aug-2010 Oct-2010 doubt people would do anything volume and 80.0% of trades in below 12%.” the spot market, according to Coincidentally, Yang’s Source: Economatica the BM&FBovespa. Most share negative outlook on the deal issuances these days fall under may have been one of the one of these rubrics. authorized the shares,” says Tomaino. reasons UBS did not participate as an Petrobras was a major exception. If Petrobras had been run under novo underwriter of the stock, which brought Instead of an arm’s length process, the mercado rules, the government, with big fees for a number of banks, despite a government was allowed to establish a less than 50% of shares, would have very low rate of just 21 basis points. “They higher price per barrel than would have been required to meet with minority didn’t like UBS.” she says. “It never helps been set by the open market. In the end, shareholders before agreeing a price. when UBS has a sell rating on the stock.” $42.5 billion of the shares will go to the In early September, Petrobras agreed If this was indeed Petrobras’ concern, government for the rights to 5.0 billion to an initial payment to the government some of these precautions were quickly barrels of oil in Brazil’s newly discovered of $42.5 billion from the proceeds of a undermined after the offering. Since pre-salt fields. share offer, in return for the rights to completion of the deal, Barclays and Itaú Barclays gave a fairness opinion on produce 5.0 billion barrels of crude oil Unibanco have both downgraded Petrobras the deal, but downgraded Petrobras from from government-held offshore deposits. equity, causing the share price to tumble. overweight to neutral shortly after it was The implied price of $8.51 per barrel was As for the low basis point fee, Duarte completed, sending the stock tumbling. In higher than minority shareholders wanted, says: “It makes sense for banks to the same week, the second of October, four and lower than the government would complain, but 21 basis points of that much other banks involved in the issue published have taken – the higher their price, the is a lot of money. They enter because negative analysts’ reports. more likely dilution. of the money, but also because of the “The fact that Petrobras was going to In September, Petobras raised $70 rankings.” LF
Index points BRL

go into a relationship with its shareholders for an oil-for-shares swap, rather than on a concession basis, we knew there would be a conflict,” says Tomaino. The government would be involved in setting the price it would be paid by Petrobras for the right to develop offshore deposits. “When Petrobras was negotiating with the government, there was no transparency in that process,” adds Tomaino. “When we were asked to authorize the issuing of shares, in June, investors could have been brought in on the prospective price that was going to be paid, but we weren’t, we didn’t have a say until we

billion equivalent by selling 2.17 billion voting shares at 29.65 reais, and 1.56 billion new non-voting shares at 26.30 reais. The underwriters were Bank of America Merrill Lynch, Bradesco, Citi, Itaú BBA, Morgan Stanley, Santander, BB Investimentos, BTG Pactual, Crédit Agricole, Credit Suisse, Goldman Sachs, HSBC, JPMorgan and Société Générale.

An Inflated Price

November/December 2010

LatinFinance 83

Latin Finance - November/December 2010

Table of Contents for the Digital Edition of Latin Finance - November/December 2010