Petróleo Brasileiro SA (Petrobras) announced an agreement in principle to acquire a controlling interest in Argentina's Perez Companc SA from the Perez Companc family and its foundation, for $1.18 billion.
Like many other Argentine companies, Perez Companc has been struggling with financial problems amid the country's fiscal woes.
Petrobras Pres. Francisco Gros said that his company intends to acquire 58.6% of the capital stock of Perez Companc. The amount paid will include $754.6 million in cash and $370.5 million in notes to be issued by Petrobras with a 6% annual coupon and a 7-year final maturity. Under certain circumstances, payment may be settled by delivery of Petrobras preferred stock in the form of American Depositary Shares.
In addition, Petrobras has reached an agreement in principle to acquire 47.1% of the capital stock of Petrolera Perez Companc SA (PPC)-which is jointly controlled by the Perez Companc family (47.1%) and Perez Companc (19.2%)-for $56.7 million in cash.
Petrobras's purchase values Perez Companc's proven reserves at $4/boe, compared with a $3/boe valuation placed on its own reserves.
Petrobras has said that it has no immediate plans to launch a tender offer for Perez Companc's remaining class B shares. Closing of the transaction is subject to the execution of a definitive share sale and purchase agreement and to four other transactions or approvals: the closing of the exchange offer of Perez Companc's subsidiary, Pecom Energía SA, in respect of its outstanding notes, as well as refinancing of Pecom bank loans, in both cases leading to an acceptable debt profile for Perez Companc; additional due diligence; final Petrobras board of directors approval; and certain required regulatory approvals.
The transaction is expected to be completed by the end of September.
What's being acquired
Petrobras is the largest corporation in Brazil and the third largest industrial corporation in Latin America. Perez Companc is the largest independently owned energy company in Latin America. Its business activities include oil and gas production and transportation, refining and petrochemicals, power generation, gas transmission and distribution, and timber.
Headquartered in Buenos Aires, Perez Companc has operations in Argentina, Brazil, Venezuela, Bolivia, Peru, and Ecua dor. PPC operates and participates in various producing concessions in the Entre Lomas area in Argentina's Neuquén basin.
The sale is the latest in a series of retreats by Perez Companc, which has sold banks, a phone company, and large tracts of land. The Argentine conglomerate has been in the oil business for 42 years.
Perez Companc has 1.1 billion bbl of crude oil reserves and produces 181,000 b/d of oil. Including these figures, Petrobras's total oil reserves jump to 10.4 billion bbl, while its oil output abroad will expand to 247,000 b/d. Petrobras's refining capacity abroad increases from 60,000 b/d to around 142,000 b/d.
The purchase of Perez Companc also pushes Petrobras deeper into South America's petrochemical industry. The Brazilian firm inherits the polystyrene plant Innova in Brazil, which produces annually 250,000 tonnes of styrene and 120,000 tonnes of polystyrene, plus other petrochemical operations in Argentina.
Perez Companc owns 40% of the petrochemical company Petroquimica Cuyo, which has annual output of 90,000 tonnes of polypropylene, 79,000 tonnes of polystyrene, and 100,000 tonnes of styrene. The company also produces 58,000 tonnes of elastomer and 200,000 tonnes of fertilizers and also produces naphtha.
"The purchase of the Argentine conglomerate will force Petrobras to establish a strategy for the petrochemical sector, because Perez Companc's assets in this sector are of excellent quality," Gros noted.
According to data from Perez Companc, its petrochemical sector represented 21% of net sales of the company in the first quarter of this year, or 571 million pesos. Last year, the company's net revenues reached $1.6 billion.
Future plans
Gros also said that Petrobras intends to build a gas pipeline between Brazil and Argentina, taking advantage of the natural gas reserves acquired from Perez Companc.
"What the market considers the Argentina risk is an opportunity for Petrobras," Gros said, referring to that country's economic malaise. He forecasts a return on investment within 5 years. Gros justified the deal by explaining that 70% of the value agreed upon will be met by the Argentine company's oil and gas reserves alone.
Petrobras has been pursuing acquisitions outside Brazil to help the country become self-sufficient in oil by 2005.
Major foreign investment in Argentina all but halted after the country's currency and debt crisis worsened severely in January. Brazilian companies have an eye on Argentina for bargains.
Gros said that his company also is considering acquiring Petrolera Santa Fe, the Argentine subsidiary of Oklahoma City-based Devon Energy Corp. (OGJ Online, June 17, 2002). Petrobras officials say they expect this deal to be inked soon.
Analysts' comments, concerns
Some analysts have shown concern that Petrobras would be adding debt by expand ing in Argentina due to that country's peso devaluation and severe recession that have caused massive losses for Perez Companc and other Argentine companies.
In explaining the transaction, Gros guaranteed that he will not take out cash from Brazil to pay for the deal, "because this would put even more pressure upon the exchange market." The Brazilian real is also suffering devaluation vis a vis the US dollar, but not at Argentina's rate.
"We will not send a single dollar abroad. We have part of (the acquisition funding) in cash flow and will eventually raise cash abroad," Gros added.
Following Petrobras's acquisition announcement, Fitch Ratings placed the company's B+ international foreign currency rating on rating watch evolving. The rating for Pecom senior unsecured foreign and local currency, meanwhile, remained unchanged at C. The unit remains on rating watch negative, Fitch noted.
Fitch viewed the deal "as having long-term positives to the foreign currency creditors of both entities." However, "In the short term," Fitch added, "Petrobras's financial position will be moderately pressured by adding roughly $3.1 billion in net debt from the consolidation of the more highly leveraged Pecom."
Longer term, Fitch noted that "the development of the newly acquired international reserves should provide Petrobras with a more diverse revenue stream and somewhat lower convertibility and transfer risks, as well as help to achieve its goal of producing and selling 300,000 boe/d outside of Brazil."
Moody's Investor's Service, meanwhile, confirmed its Ba1 foreign currency rating for Petrobras with a negative outlook. It also confirmed its Ca rating for Pecom's global bonds. "The rating confirmation," Moody's said, "reflects Petrobras's strong liquidity and use of equity financing of the transaction from its cash resourcesellipsecoupled with strategic benefit and relatively economic purchase price of hydrocarbon reserves."
According to an analysis by Citigroup Bank, "In our view, the transaction is positive for both Perez Companc and Petrobras. For Perez Companc, this transaction secures the company's long-term viability as an ongoing concern by lowering costs of capital.
"Moreover, we believe the timing of this offer intends to help Perez Companc secure a lower refinancing coupon on ongoing negotiations with its bank syndicate. For Petrobras, the acquisition is in line with its long-term international expansion strategy, integrating its existing Argentine business from distribution to upstream," the bank's report said.
"In our view, the worst possible combination affecting stock performance would be increased political volatility in Brazil and softening international oil prices. The stock has recently reflected Brazil jitters over the upcoming (October) presidential election, despite continued strength in oil prices. We expect Petrobras is likely to remain volatile in the face of political uncertainty in the run-up to Brazil's October presidential election," the bank said.
Wood Mackenzie Ltd., meanwhile, stated that it is difficult to evaluate whether Petrobras would be acquiring Perez Companc at a good price. "Given all the uncertainties, it is very difficult to value assets in Argentina at present," the analyst said, adding "It is certainly a significant discount from Perez Companc's value only a year or 2 ago, and market sentiment is that Petrobras has got a good price."
Wood Mackenzie went on to evaluate the significance of Petrobras's pending acquisition in terms of what it means to Argentina's energy sector, stating, "ellipsethere are many questions such as whether this (acquisition) signals the start of a fire sale (in Argentina). Is it the end of the Argentine independent?" it asked.
"It is also curious that Petrobras has already stated that it is not planning to acquire the remaining equity," Wood Mackenzie added. "Having already secured management control (of Perez Companc), it is likely that the company sees such a move as unnecessary-perhaps it will wait until the economic outlook is better."
