Eike Batista: Can the Brazilian Tycoon Revive his Crumbling Empire?

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Case Details:

Case Code : FINC090
Case Length :17 pages
Period : 2003-2013
Pub. Date : 2013
Teaching Note : Available (7 Pages)
Organization :EBX Group, OGX
Industry : Petroleum, Infrastructure, Mining
Countries : Brazil

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

The Rise

In November 2007, Petrobras announced the discovery of an oil bed in the Santos Basin, off Brazil's Southeast coast. It was the largest discovery in Brazil with a potential of 5 to 8 billion barrels of oil and natural gas. This was the largest ever find of oil and gas in deep waters. Just before the scheduled auction of exploration bids on November 27, 2007, the Brazilian National Agency of Petroleum, Natural Gas and Biofuels (ANP), the national petroleum agency and oil sector regulator of Brazil, withdrew 41 blocks close to the newly discovered field from the auction. With this, several oil companies did not participate in the auction, and OGX submitted bids for exploration rights in 21 blocks in four different shallow tracts. For these, the company offered US$ 800 million. The money was raised from an equity private placement as well as Batista's own funds. ...

The Fall

The Brazilian economy, after years of growth, started to slow down after 2010. The economy which had grown at 7.5% in 2010, witnessed a growth of only 0.9% in 2012, according to the World Bank. (Refer to Exhibit V for a Note on Brazilian economy). This also started to impact investors' confidence in the country. At the same time, the price of crude fell from US$ 125 to US$ 94 per barrel. According to Anisa Redman of HSBC, “When the oil price drops like that and the markets are weak on disappointing macroeconomic newsflow, investors are often forced to sell.” ....

The Aftermath

OWith no more options available to raise debt, the company started selling assets. In May 2013, Batista sold 40% stake in Tubarão Martelo to Malaysia-based Petronas for US$ 850 million. In May 2013, Batista sold 24.5% of his 53.9% stake in MPX, considered by experts as the healthiest of all EBX companies, to Germany-based E.ON SE for US$ 700 million. After the deal, E.ON's stake increased to 36.2% as it already held 11.7% in the company. In June 2013, Batista stepped down from the position of Chairman of the company. The company also planned to change its name so that it would be outside the purview of EBX....

What Next?

Batista was caught in a tricky situation with most of his projects in the early stages of execution. This meant they would not show immediate returns and also that they would need more funds. Another Brazilian billionaire, André Esteves (Esteves), was of the view that the projects of the group were viable and relevant, “Many people question the indebtedness of the EBX group, but even with its shares very depreciated, there is a significant positive asset value. The debt is not that great. What exists is a demand for future investment that needs to be calculated project by project.” ...

Exhibits

Exhibit I: OGX – Financial Data
Exhibit II: Balance Sheet of OGX
Exhibit III: OIncome Statements of CCX, LLX, OSX, MMX
Exhibit IV: Consolidated Income Statement
Exhibit V: A Note on Brazilian Economy
Exhibit VI: Stock Price Chart – EBX Companies
Exhibit VI: Key Financial Metrics – OGX

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