For 30 years, a few giant state-owned companies dominated Brazil’s petrochemical industry, together with a wobbly alliance of local and foreign private-sector companies linked together in a tangle of cross-shareholdings. As the state retreated from industry during the privatizations of the 1990s, it did little to straighten out the sector’s confusing and conflicting ownership structure. This disorganization undermined their ability to operate efficiently in a rapidly consolidating business.
In the case of Companhia Petroquímica do Nordeste, matters were even more confusing. The Central Bank acquired a majority stake in the key petrochemical complex when it assumed the assets of the bankrupt Banco Econômico. In 1997, the Central Bank mandated UBS Warburg to sell Petroquímica do Nordeste, known as Copene, to the private sector.
Last July, after two failed auctions, the Central Bank finally unloaded its 68.08% stake in Copene, selling it to the Brazilian chemical and engineering groups Odebrecht and Mariani for $541.9 million. Legal and political complications associated with Banco Econômico’s collapse had strung out the Copene divestment for four years.
The sale in 2001 to Odebrecht and Mariani has finally rooted an important part of Brazil’s petrochemical industry firmly in the private sector and placed it under firm management with a mission to set it on a path to increased productivity. It also takes LatinFinance’s prize for privatization deal of the year.
Copene is the country’s largest producer of petrochemicals and last year posted pretax earnings of $157.9 million on sales of $1.79 billion, giving it a 9% margin. Although average for the industry, its performance was hamstrung by its complicated ownership. In addition to the Central Bank, Copene had more than 20 owners, many of which held stakes in each other and also in related holding companies.
Until now, the shareholder structure of Brazil’s petrochemical industry practically defied comprehension so tangled and diluted were the ownerships of the companies in its three sectors: basic, intermediary and final product producers. Rather than being owned by strategic investors, most of the companies were ultimately controlled by their customers. Early-stage companies, like Copene, were owned by second-stage processors, which in turn were owned by the end processors. Indeed, a diagram of the industry’s cross shareholdings resembles a circuit board. Complicating things even more is the fact that the processors were organized by region, rather than by product line, as is done elsewhere in the world. All of these factors hindered growth and efficiency.
By the middle of this year, Odebrecht and Mariani expect to have integrated Copene into their other businesses to create a company that unifies two key stages of petrochemical production. Odebrecht Quimica, the group’s chemical arm, invested more than $1.3 billion between 1978 and 1996 in Brazil’s chemical industry. The new integrated company, known as Braskem, will also consolidate minority shareholders’ interests in second-stage producers.
“This transaction unlocked a lot of the synergies and value that were trapped by a very fragmented ownership structure,” says Carlos Guimarães, head of Latin American investment banking at Citigroup, “and it created a much more powerful and effective player.”
Fabio Ferraz, a director of UBS Warburg based in Brazil, says that although the sale of Copene was long and complicated, it represents a key change in the industry. “In terms of creating scale, aggregating assets and adding value, this sale was very important because it helped consolidate such ownerships,” he says.
Ferraz says the deal was especially difficult to execute in part because the asset belonged to an intervened bank portfolio and also because of political and administrative issues within the Brazilian government and the central bank. But the transaction also had to take into account the competing public and private interests that owned stakes in Copene.
Several years ago, Odebrecht had bought a stake in Copene that it later wanted to sell. In 1999, it formed an alliance with the Central Bank and Grupo Mariani to create a block of shares in the hope that it would increase Copene’s attractiveness to a buyer. It did not. The government’s first two auctions of Copene did not attract a minimum bid. At the time of those auctions, Odebrecht and Mariani did not have the resources to participate but by last summer their debt profiles had improved enough to make an offer for the Central Bank’s stake in Copene, says Bruno Boetger, head of Brazilian M&A at Citigroup.
Odebrecht and Mariani had to quickly assemble $500 million in bridging loans to cement the acquisition, which Citigroup arranged, and then secured a take-out facility in the local and international markets. In the end, Odebrecht and Mariani acquired Econômico Empreendimentos, a holding company for Norquisa, the controlling shareholder of Copene.