Revista Capital Aberto - "X" marks the flop
The more incipient a project, the harder it is to establish its value-creating potential. In the case of the companies created by billionaire Eike Batista, the greatest disseminator of the "pre-operating company" concept on the Brazilian exchange, this rationale curiously does not apply. The closer they get to finally starting production, the less certain investors are about the value of their shares — an inglorious situation for a group that raised a whopping R$ 12 billion (about US$ 6 billion) on the BM&FBovespa with nothing but IPOs. But in recent months, Batista’s Midas touch has somehow transformed into "Eike risk". The mega-mogul is accused of not delivering on his promises to investors, or at least not on time. On the BM&FBovespa, the market’s backlash is plain to see. Today, every single equity of EBX Group on the São Paulo exchange (with the sole exception of MMX) is trading below IPO price. Most of the group’s subsidiaries entered the stock market between 2006 and 2010 (see information graphic).
To make matters worse, the conglomerate is deeply in debt. The holding’s five publicly-traded companies (MMX, OGX, MPX, LLX and OSX) reported a consolidated net debt of R$ 15.8 billion, or roughly US$ 7.9 billion, for the third and fourth quarters of 2012. Their year-end cash position for 2012 was R$ 8.3 billion (roughly US$ 4.15 billion). These figures help to explain why Batista has secured stronger partnerships with BNDESPar, the equity holding division of Brazil’s national development bank, the BNDES. According to the institution’s quarterly report, in June 2011, the bank held an interest in only one EBX company — MPX Energia. In March 2012, the list expanded to three; then five in June.
However, things would probably be looking a lot bleaker if the mastermind behind the empire was not Eike Batista. In early March this year, EBX Group entered into a strategic cooperation partnership with BTG Pactual, the bank owned by André Esteves. The agreement involves not only lines of credit and financial advisory, but also future long-term capital investments for EBX projects. In light of the importance of EBX’s infrastructure initiatives in Brazil, President Dilma Rousseff also wants to lend a helping hand. According to a story published in Brazil’s leading economic newspaper,
Valor Econômico, Batista wants to convince Petrobras to install its entire logistics headquarters for subsalt oil at LLX’s Açu port in northern Rio de Janeiro State.
"The transition of Eike Batista’s companies from pre-operating to production phase is turning out to be more complicated than we expected," confesses one asset manager who has held some of the fund industry’s largest positions in "X company" shares. He began disinvesting from the equities two years ago, then finally eliminated all exposure early this year. It is not difficult to see why. One hundred percent of a "prospective" company’s value derives from the expectations it generates. "A simple delay in delivery of a construction project can seriously compromise its fair price valuation," the manager explains. And the delays were plentiful for Eike Batista’s projects. His companies lost value, costing him the status of Brazil’s richest man. What happened? Read on for a brief look at the challenges faced by each of the X’s.
| "The market often sees and hears only what it wants to see and hear" |
OGX — The oil corporation’s wells fueled the strongest wave of investor mistrust against Eike Batista and, consequently, his companies. OGX is seen as the most important member of the conglomerate. Its debut on the BM&FBovespa took place in 2008, raising R$ 6.7 billion (about US$ 3.35 billion) in the largest IPO that Brazil had ever seen. Batista promised to extract the first drops of oil in 2011 and close the year with production in full swing at 20,000 barrels per day. But start-up was delayed and the company ended 2012 producing slightly above 10,000 barrels per day — no more than a fourth of the year’s projected output. The fact is that the two extraction wells operated by OGX in 2012 are not capable of producing much more than 5,000 oil barrels per day. Even so, just months before that volume was announced to the market, the company insisted that a daily output of up to 20,000 barrels per well was possible. "The output from an oil well tends to decline over time, so it would be impossible for OGX to achieve its initial estimate," explains Marcus Sequeira, an analyst at Deutsche Bank. In February 2012, OGX reported a daily output of 16,800 oil barrels, 2.4% more than in January and a 44.8% improvement over February 2011.
This series of frustrated expectations translated into a fiasco on the exchange. OGX ended 2012 with shares trading for 70% less than in the previous year, according to data from Economática. By March 8 this year, the stocks had lost an additional 29% of their value and dragged OSX down with them. OSX is the conglomerate’s shipbuilding subsidiary, with OGX as its main client, and its shares slid nearly 40% in the same period. Specific events have helped to temporarily lift the prices of OGX shares, such as the news that Batista will be selling his own stake in the company to Malaysia’s state-owned Petronas, as published by Valor Econômico (but not confirmed by the company before this issue’s closing date). When the story came out, OGX shot up 12%. But other than that, there is no expectation of a consistent reversal in the company’s steady decline on the BM&FBovespa — in fact, recent information has been painting an even bleaker picture. With a third oil well in operation since early this year, OGX’s output per well dropped to a daily average of 4,900 barrels.
MMX — The situation at MMX is less extreme, but not by much. MMX, the mining subsidiary of EBX, was the conglomerate’s first company to be listed on the BM&FBovespa, back in 2006. At the time, the company’s projected output for 2011 was approximately 37 million tonnes of iron ore. When 2011 came around, production did not exceed 7.5 million tonnes. The total extracted last year has yet to be released, but no one is expecting any miracles. By September, the company had produced around 5.7 million tonnes.
For MMX, distribution logistics is a major problem. The company intends to export most of its production but, for that, it needs to get Superport Sudeste up and running. At present, MMX iron ore that gets shipped abroad is distributed through the Cargo Terminal of Itaguaí Port in Rio de Janeiro, which belongs to CSN.
The initial plan had been to start up Superport Sudeste, currently under construction on the coast of Rio de Janeiro State, by the end of 2011. Now, the most optimistic forecasts predict the start of operations sometime this year. "Without the finished port, it would be pointless for MMX to invest in output expansion, as the terminal that it uses for exporting restricts its throughput to 1 million tonnes per year," says Victor Penna, analyst at BB Investimentos. "Until then, the company will not make any headway on the exchange." This was already the case for MMX in 2012, when its stock lost one third of its value. This year, after getting slapped with a R$ 4 billion fine (roughly US$ 2 billion) by the Federal Revenue of Brazil for overdue tax payments, MMX share prices dropped an additional 25% by mid-February. The dive was so abrupt that BB Investimentos temporarily suspended its analyses on the company.
LLX — In the logistics segment, with LLX, Eike Batista has not been faring any better. The company’s main project is to install Superport Açu in São João da Barra, northern Rio de Janeiro State. The enterprise is already viewed as the largest industry-port in Latin America, with the potential to become one of the world’s largest port complexes. That is, when it finally opens for business. In 2008, when LLX made its IPO on the BM&FBovespa, the company promised to start operations at Açu in 2011. The new opening date is sometime near the end of 2013.
The company has announced some favorable news, such as a recent agreement with GE for the construction of a production plant in the Açu port area – but it wasn’t enough to keep LLX shares from depreciating by more than 30% in 2012. By mid-February this year, an additional 20% dip had ensued when the market was told that Subsea 7, a Norwegian submarine builder, changed its mind about installing a facility at Açu.
Apart from the delays, LLX has also been facing a common problem at Eike Batista’s companies: frequent changes in management. Last year, then-CEO Otávio Lazcano was relocated to EBX, where he was named CFO. Marcus Berto took his place at LLX. Five of the group’s six listed companies changed their CEOs in 2012, some of them swapping head executives among themselves. The current CEO of OGX, Luiz Eduardo Guimarães Carneiro, for example, was OSX’s CEO until June last year.
In 2012, Eike Batista took the initial steps to delist LLX from the BM&FBovespa, but changed his mind when a Bank of America Merrill Lynch valuation estimated a fair price that was double what he was proposing to offer per share. In theory, when a company owner proposes to buy shares back from the shareholders, it is because he believes that the company is worth more than the value attributed to it by the market. In LLX’s case, Batista preferred not to risk it.
CCX — Created to extract coal from Colombian deposits belonging to MPX, CCX would be doing even worse if it weren’t for one thing: it is about to bid the BM&FBovespa adieu. Batista announced the company’s delisting in January 2013, less than a year before presenting it to the market. With the news, CCX shares shot up 70%. Even so, they are still trading for less than half their IPO price of May 2012. To justify his decision, Batista claimed that CCX will be compelled to change its strategy plan due to "deteriorating conditions in the mineral coal market".
In the first business plan for the Colombian mines, disclosed in 2010 when the assets still belonged to MPX, production was expected to start in 2012. The year came and went and the mines, already transferred to CCX, remained unexploited. In recent corporate presentations, CCX defended that it would be possible to initiate coal extraction in 2014. From the shareholders’ perspective, analysts recommend keeping a close eye on CCX’s delisting, which is still in progress. Investors need to choose whether or not to sell for the price that Eike Batista is offering — R$ 4,31 per share (about US$ 2,2), paid in shares of other EBX companies.CCX made its debut on the exchange at an IPO price of R$ 8.50, or roughly US$ 4.25. "We cannot condone this opportunism, handing over the shares at such a tremendous discount," wrote the Empiricus consultancy in a report in January.
MPX — EBX’s electricity generator has been the group’s best performer. By the end of this year, MPX is planning to launch four thermoelectric power plants in the states of Ceará and Maranhão. An additional two plants, one in Ceará and the other in Amapá, have already been up and running since 2011 and 2008, respectively. "The possibility proposed by the National System Operator (ONS), of having thermoelectric plants generate power continuously throughout the year to make sure that the hydroelectric reservoirs will be full in 2014, is good news for the company, " assesses Adriano Pires, director of the Brazilian Infrastructure Center (CBIE).
But don’t think that MPX simply fired up the generators without a hitch. Some plants were not finished on time and, because the supply contracts were already in effect, the company was forced to buy electricity on the market in order to honor them. To name just one example, delayed start-up of the Pecém I plant in Ceará resulted in additional costs for MPX to the tune of R$ 26 million (about US$ 13 million) in the third quarter of 2012 and another R$ estimated R$ 130 million (roughly US$ 65 million) in the fourth quarter, according to calculations by HSBC analysts. The market was unforgiving. The company’s shares dropped 9% in 2012 and another 2.9% in 2013 by March 8. "The general impression is that the market is punishing MPX too harshly," says a fund manager who, in recent months, reduced his exposure to MPX shares to the lowest level in years. "Everything that happened to the company from mid-2012 to the present was expected. This decline appears to be happening for no other reason than the company having an X in its name." In late February, MPX and Germany-based E.ON announced that they will be entering a joint venture aiming to accelerate growth and develop a bigger and more profitable energy market in Brazil and Chile. For this, MPX will raise about R$ 1 billion (roughly US$ 500 million) through a capital increase in which E.ON will invest approximately R$ 850 million (about US$ 425 million), acquiring a 10% stake in MPX.
NOW WHAT? — Despite all those unfulfilled promises, some investors are hanging on to hope. They believe that 2013 will be better than 2012 for Batista’s companies. The start up of MPX’s thermoelectric plants has been lifting the spirits of the company’s shareholders, and a new scenario is also presenting itself for MMX and LLX as their port complexes come closer to opening for business. The possibility of new oil exploration areas being auctioned out this year is good tidings for OGX, in spite of the "sell" recommendations by UBS, BofA and Credit Suisse.
