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Type of situation: Three buyout offers on the table with share price at cyclical low

Market Cap: $2.61B – Price at publication: $6.68 per ADR

Why look at this?

Braskem S.A. is a Brazilian petrochemicals company mainly engaged in the production of thermoplastic resins. The company has received three independent buy-out offers over the course of 2023. Several hints point to the potential completion of the sale of the company in Q1 2024. After reports of those offers surfaced in May and June, shares rose up to $12.50 but have since traded down again, to levels before any news were circulating regarding a potential buyout. Its largest shareholder (38.3%) was the now bankrupt Brazilian Odebrecht Group (through its holding company Novonor). Its stake was pledged to a consortium of banks that hold them as collateral against loans they made to the bankrupt conglomerate. The banks are seeking to sell the Odebrecht stake in the business in order to recover some of the funds that Odebrecht/Novonor has defaulted on.

The offers that have emerged over the course of Spring and Summer 2023 have come from the Abu Dhabi state-owned oil company ADNOC, from Brazilian petrochemical business Unipar and from J&F Investimentos, a private investment company linked to the Batista family with large interests in various industries across South America.

The company’s second largest shareholder is the Brazilian state-controlled oil giant Petrobras (36.2%). The company’s CEO has hinted that they are expecting some kind of deal or decision on the matter to happen by January or February of 2024 either as a complete buyout or as part of a joint venture with one of the bidders. Offers for a buyout of the Odebrecht stake/entire business range between US$12.97 and US$14.45 per ADR (one ADR equals two common shares listed in Brazil) with theoretical upside potential between ~70% and 90% should a deal happen at the disclosed potential bids. The company’s shares and ADRs are also currently trading in reach of their multi-year cyclical lows, providing decent downside protection despite the buyout offers.

Essentially, there are three issues complicating the situation: First, the company’s ownership structure and second, its shareholder agreement and the question on how to treat minorities in case of a partial or full takeover and third, whether a bidder will commit to purchasing the entire company including minority stakes.

A lot hinges on how quickly the banking consortium can decide on who and for what price to sell the Novonor stake to as well what Braskem’s second largest shareholder, Petrobras, prefers as outcome of the current limbo situation.

And then it is unclear whether a buyer would offer tag along rights to minority shareholders (whereas they would have to extend the same deal metrics to Petrobras should they only want acquire the Odebrecht/Novonor stake and vice-versa) or whether minorities would be orphaned here.

Shareholders

The company’s shareholders play a key role in this situation. The two major Brazilian shareholders Odebrecht/Novonor/banking consortium and Petrobras together control 74% of the company.

NSP Investimentos S.A. / former Odebrecht/Novonor stake (38.3%)

• Behind this investment vehicle was once the Brazilian conglomerate Novonor, formerly known as Odebrecht. This Novonor entity held shares of the company Construtora Norberto Odebrecht S.A., the biggest engineering and contracting firm in Latin America and the stake in Braskem.

• Odebrecht was involved in one of the largest corruption scandals to ever rattle South America, “Operation Car Wash”. The anti-corruption investigation revealed in 2016 that, among other items, Braskem paid bribes to Petrobras executives to have their conditions accepted in their long-term naphtha supply agreements. Furthermore, Odebrecht executives were also involved in bribing top Brazilian politicians to gain awards for multi-million construction concessions. On 8 March 2016, Marcelo Odebrecht, CEO of Odebrecht and grandson of the company's founder, was sentenced to 19 years in prison after being convicted of paying more than $30 million in bribes to Petrobras executives. In the wake of the scandal, Brazil’s former (and current) president, Lula da Silva, was also jailed, although released after just one year following a supreme court ruling.

• Since the investigation, the name Odebrecht has become associated with the bribery scandal, as well as the centerpiece in a number of other high profile bribery scandals in South America. In 2016, the company was fined $2.6B by the U.S. department of justice in what was the largest corruption case ever prosecuted under the US Foreign Corruption Act.

• In the wake of the scandals, jail sentences and fines, Odebrecht had to file for bankruptcy in August 2019.

• After the collapse of Odebrecht following the scandal, the stake is now essentially seized by a consortium of creditor banks that are owed substantial debts by the former Odebrecht / Novonor conglomerate.

• Among the consortium are Santander, Banco do Brasil, BNDES, Bradesco and Itaú Unibanco. The debt owed by Novonor to the banks matured in September of 2022 and since then the term had been renewed by the banking consortium. The last renewed maturity occurred at the end of March after which the stake was taken into receivership.

  
  

• Odebrecht/Novonor’s creditor banks are seeking to offload the Braskem stake now in order to recover their funds which could be fully covered by a sale of the stake in the petrochemicals business. Also, the sale of the Braskem stake seems to be the only way for the banking consortium to recover their funds given the peculiar situation their debtor finds itself in.

Petrobras SA (36.2%)

• Petrobras is the Brazilian state-owned oil major and one of the largest global oil producers. It is listed in Sao Paulo, Madrid and via ADRs on the NYSE. The Brazilian state controls slightly over 50% of the voting power.

• The company had stated in its 2022 strategic review that it was aiming to sell its position in Braskem. However, with the company’s new CEO, Jean Paul Prates, it has stated that the original plan was “irrational” and that the company was not going through with it.

• In March, Petrobras’ CEO Jean Paul Prates gave an interview to Bloomberg, saying that the company “abandoned an “irrational” policy of the previous management of selling assets to raise funds, and was even considering increasing its stake in the petrochemical company Braskem. “It was a really irrational way of selling things. Now the company wants to approach portfolio management with “another plan, within another strategy”. Prates left all options open in the interview, saying that “selling shares is still an option, but so is increasing the stake. We can sell or buy”.

• During the course of this year, the company issued a various statements on a very regular basis that it was still reviewing the Braskem situation and that Petrobras has not made a decision on what it will do with its stake:

„São Paulo, March 27, 2023 – Braskem S.A. (“Braskem” or “Company”) (Ticker B3: BRKM3, BRKM5 and BRKM6; NYSE: BAK; LATIBEX: XBRK) hereby informs the market in general that, in view of the news published in the media regarding Petrobras´s shareholding participation in Braskem, it requested clarification about such news to Petrobras, which informed that released the following notice to the market: “Petróleo Brasileiro S.A. – Petrobras, regarding the pieces of news published in the media, informs that no decision has been made by the Executive Board or the Board of Directors in relation to the Braskem divestment process. Petrobras clarifies that al actions related to its participation in Braskem require careful analysis from a portfolio management perspective and should be conducted in compliance with applicable governance practices and internal procedures. The Company reiterates its commitment to the broad transparency of its divestment processes and portfolio management and that material facts wil be timely disclosed to the market.” Braskem informs that it will continue to support Shareholders and will keep the market informed about relevant developments, in compliance with applicable laws.“

• In a most recent development, Jean Paul Prates said in a TV interview on October 2nd regarding the situation around the Odebrecht/Novonor stake:

“The party selling its stake is Novonor/Odebrecht, which has a majority stake in Braskem […]. Petrobras, in principle, is interested in maintaining its position. Whether we will increase our position depending on the partner chosen, or whether we will exercise the preemptive right to buy the remainder, or even sell your stake, which is less possible since we are indicating a path towards verticalization, who will say? The process itself: We intend for this process to be completed by January and February at the latest”

• As Petrobras is still debating over what to do here, it has, however, publicly maintained through its CEO that a decision on the Braskem situation should to be taken by January or February of 2024 at the latest.

1. PBR does nothing and simply awaits what will come of the disposal of the Novonor stake by the creditor banks.

2. PBR emerges as a buyer for the stake, a scenario I see as mainly unlikely given that they have not stated anything in that direction.

3. PBR disposes its stake to a buyer that takes the entire company private, which also seems unlikely given that the oil company has said that it seeks to integrate vertically in the future.

4. PBR partners with one of the bidders (presumably ADNOC) and forms a JV to run the petrochemical company. This scenario has become increasingly likely as it seems to be the preferred route for PBR and the Brazilian government which will have a say in the transaction.

   
   

Offers

Over the years, there have been a number of offers (and rumors of those) for Braskem to take the company private. In 2018, Braskem had received a buyout offer from LyondellBasell (NYSE:LYB), one of the largest plastics, chemicals and refining companies in the world. LYB entered into an exclusivity agreement, however, after the Maceio incident in which Braskem was responsible for a severe environmental catastrophe in Brazil and the bankruptcy of one of Novonor’s largest subsidiaries, the deal didn’t go through.

According to one source, Novonor subsequently mandated Morgan Stanley in early 2021 for consulting on a new try on the sales process. Apparently, back then there was interest from names such as Advent, Mubadala, BTG Pactual’s private equity arm and Unipar.

In 2023, three offers emerged as the situation around the Novonor stake has become more urgent for the creditor banks that are seeking to offload the stake to recover their funds. Those offers are likely currently being considered by both the banking consortium as well as Petrobras as the second largest shareholder that enjoys tag-along rights.

First offer: ADNOC (Abu Dhabi National Oil Company)

• ADNOC had originally submitted a bid in tandem with Apollo Global Management. Over the course of the year, however, Apollo has apparently pulled out of the deal. Abu Dhabi seems to be willing to go alone on this one and the current plan appears to be of forming a JV together with Petrobras to take over the company and each hold 50% of the company.

• The original ADNOC/Apollo offer was cited to be as high as R$47 per share, however of which R$20 would be paid in cash, further R$20 in perpetual debentures and the remaining R$7 in warrants. Other reports speak of a more conservative consideration of R$33.28 (US$13.32 per ADR) per share payable in cash for the remaining shareholders (2 shares equal 1 ADR).

• The ADNOC JV proposal seems to be the preferred way to go for Petrobras and potentially the government of Brazil, too. In the case of a JV in which both companies will hold 50% of Braskem, granting minority shareholders tag-along rights seems highly plausible. The complicated payment structure, if implemented as proposed, would certainly cause some headaches for smaller investors, although I’d be inclined to say that potentially, tag-alongs could see a simplified cash offer extended to them.

Second offer: Unipar

• Unipar is a leading producer of chlorine and soda in South America and has offered R$36.50/share in cash for the Novonor stake in Braskem in June, which translates into US$14.45/ADR.

• Analysts have voiced some concerns over antitrust issues as the company would then control 100% of the local chlor-alkali market. Unipar has also not yet disclosed how it would finance the transaction.

• Further, this offer so far has been geared at the Novonor stake and tag-along rights are questionable here. Originally, it was reported that Novonor would remain a 4% shareholder under the transaction.

Third offer: J&F

• J&F is a holding company owned by the Brazilian Batista family and serves as an umbrella for their various holdings.

• Activities of the family business range from agriculture to meat processing to aluminum can production, plastic resins, and various other activities. J&F owns JBS, the world’s largest meat processing company. Additional company business and endeavors are myriad and includes the purchasing and selling of various products such as palm oil, tallow and soy grains, electricity generation from biomass, pulp production and distribution, industrial waste management, consulting services, real estate acquisitions, sales and leasing, publishing agribusiness information, and several other activities.

• The company has submitted an offer for the entire company at R$32.78/share (US$12.98/ADR). Tag along rights for minorities are within plausible realm in this scenario.

  
  

Shareholder agreement – Right of first refusal / tag along rights

Novonor and Petrobras have signed a shareholder agreement that maintains rules on what happens when a third party purchases a stake. While there are numerous items negotiated in the shareholder agreement, for the purpose of this situation we’ll look at just three of them:

• Notification: In case any of the two parties has received and accepted a firm good faith offer to dispose of its shares to a third party, the selling shareholder shall notify the remaining shareholder of its intention to sell its stake (“Notice of Sale”). After the remaining shareholder has been notified, it has 60 days to exercise its right of first refusal or its tag-along rights.

• Right of first refusal: Both shareholders grant each other the right of first refusal to either purchase the shares destined for sale in the presence of a firm good faith offer or appoint a third party to acquire those shares; in both cases according to the general terms and conditions of the offer the selling shareholder has struck with its bidder.

• Tag along right: The remaining shareholder is entitled to the right to demand a disposal of its own shares on the same general terms and conditions as the other party has received. The other shareholder therefore has the right to “tag-along” to the offer that the other party may receive.

However, those rights apply only to the two major shareholders, Novonor / banking consortium and Petrobras. For minorities, this situation becomes a bit tricky should a bidder only be interested in purchasing the Novonor / Petrobras stake(s) and be done with that. However, due to the structure of the shareholder agreement, any bidder must be ready to offer tag-along rights at least to the other major shareholder.

I find it hard to see a situation in which a reputable bidder would submit a binding offer and then not be ready to potentially fulfill its obligation to provide tag-along rights for the other major shareholder as outlined in the shareholder agreement.

Debt

Multiple voices have opined on Braskem’s high debt levels. However, I’d like to point to the company’s large cash position of $2.90B vs. total debt of $7.86B. However, the company’s maturities are, for the most part, far out with meaningful refinancing needs not starting until 2028. Close to 60% of total debt is due after 2030. While the debt position is not low, the far-out maturity schedule gives investors comfort for quite some time, even if a recovery in petrochemicals markets takes longer than anticipated.

Current weakness

Shares have now shed all their gains since any sort of rumors regarding a potential take-private emerged. The weak performance of Braskem as well as the entire sector also certainly weighed on the stock; The company said that sales would be materially weaker in its most recent guidance last week. Further, Braskem is currently FCF negative, although most of that is due to environmental charges linked to the Alagoas disaster.

However, per the latest reporting, Braskem should be done with compensating and re-locating victims caused by the environmental accident soon, making the company close to FCF positive.

Government

With Petrobras being a state-controlled entity and number two shareholder at Braskem and the petrochemicals business being regarded as a strategic asset, the Brazilian state has a vested interest in a positive outcome of the current limbo situation. Several sources point to the Lula government being quite constructive on a deal but nevertheless, the government will have the final say in any type of transaction.

Risks

Transactional risks have been discussed and are concentrated around the questions of whether a binding offer emerge for the company/the Novonor stake, whether minority shareholders would be considered with tag-along rights and whether the Brazilian government OKs the transaction.

What is particular interesting here is that despite three offers being rumored around not unrealistic bidders, Braskem’s shares are again trading close to multi-year lows – implying that no deal will happen. However, the situation in where one has not just one but three private market valuations on hand which are substantially higher than the current valuation, paired with generally very weak sentiment around petrochemical businesses around the world and the recent comments made by Petrobras, I still believe that this buyout play makes sense.