Brazil’s Petrobras: Crisis and Opportunity
Antonio Felix de Araujo Cintra, Partner at TozziniFreire Advogados, comments on the business and economic impact of the current crisis surrounding Petrobras, the Brazilian state-controlled oil and gas company and the largest company in Brazil. Petrobras is under investigation by the Brazilian Federal Police and the Federal Prosecutors Office for alleged corruption practices.
TozziniFreire Advogados is a full-service law firm that provides legal services to domestic and international companies in a wide variety of business sectors. The firm has played a major role in many transactions in the Brazilian market.
In recent months, business newspapers and magazines from the Financial Times to The Wall Street Journal have published many articles and reports about the crisis that is currently affecting the operations and businesses of Petrobras, the Brazilian state-controlled oil and gas company, which is the largest company in Brazil. The reason for this publicity has been that Petrobras and some of its officers are currently under investigation by the Brazilian Federal Police and the Federal Prosecutors Office for alleged corruption practices. The investigations are based on confessions made by a few of Petrobras’ officers and managers that a relevant portion of the company’s business involved overpricing and bid rigging procedures. These confessions have been made by such persons in exchange for more lenient penalties at the end of the process. The investigations extend beyond Petrobras to some of the largest contractors in Brazil, as well as other local and international suppliers of Petrobras. To this point, the entire process has already resulted in the temporary imprisonment of several directors and officers of Petrobras and of some of Brazil’s largest contractors.
“The investigations extend beyond Petrobras to some of the largest contractors in Brazil, as well as other local and international suppliers of Petrobras.”
Apart from the criminal implications, the investigation is expected to have a major business and economic impact in the next few months. Many of the companies involved in the investigation are already suffering the consequences of the scrutiny and have had serious difficulties in obtaining finance and new contracts to continue their operations. Some have already defaulted in their financial obligations. Depending on the outcome of the investigations and possible lawsuits, certain companies may be barred from entering into contracts with the public sector in Brazil.
One potential result of these investigations is that many of the companies involved may have to sell substantial portions of their assets to continue to survive in a reorganized fashion. Since the companies involved are some of the biggest and more active contractors and sponsors in Brazil, they operate or have equity participations in many of the most important infrastructure projects in Brazil. We are already reading in the news that a few large infrastructure projects are being offered by the companies to potential investors. From what we read and hear from market sources, the assets being sold include holdings in large international airports that were recently privatized, toll roads, water treatment and waste management operations and several others.
“One potential result of these investigations is that many of the companies involved may have to sell substantial portions of their assets to continue to survive in a reorganized fashion.”
Recent news published in Brazilian newspapers and internet news publications reference international private equity funds and other investors preparing to take advantage of such opportunities. In addition to the infrastructure projects mentioned above, there is also interest in companies that have agreements with Petrobras and may have performance difficulties due to lack of credit.
Examples of assets that are being offered in the market and that have been mentioned by news publications include the water and sewage operations and three soccer arenas owned by OAS, a large local construction company. In addition, OAS may be selling its equity participation in Invepar, a company that invests in concession toll roads in several states of Brazil, in a subway line in Rio de Janeiro and in the international airport of Sao Paulo. Another company, Engevix, is said to be negotiating its participation in renewable energy, airport and shipbuilding companies.
These are transactions that have already transpired. However, there seem to be many other businesses that may have to change hands soon, and fund managers that have a global strategy for investments in infrastructure and oil and gas should look to Brazil for new opportunities.