Brazil’s petrochemical industry was restructured in mid-March. The sale of Ipiranga — a Brazilian company that has a strong presence in the distribution of petroleum derivatives — to state-owned Petrobras, petrochemical group Braskem and the Ultra Group, a gas distributor, is a significant milestone, say the experts. Despite denunciations of serious irregularities, the dynamics of the marketplace have been changed in the country’s petrochemical market and its market for the sale and distribution of fuel. Universia-Knowledge at Wharton examines the intricacies of the largest purchase in the history of the Brazilian petrochemical industry.
“There are two dimensions of the negotiations that need to be understood,” says Edgar Luis Fagundes de Almeida, a professor at the Institute of Economics of the Federal University of Rio de Janeiro. “The first dimension, involving the distribution of fuels, is the less important.” The second, he adds, “involves the petrochemical market, where it means a consolidation in the market. More than distribution, this deal has produced an upheaval in the petrochemical sector. That sector was disorganized from the viewpoint of business structure. Until now, it has not been possible to strengthen a global petrochemical company without having some concentration [in ownership] and in the distribution profits. Until this acquisition, this segment was very fragmented in Brazil. It was characterized by cross-ownership relationships and family-owned companies, and it was hard to make more aggressive moves into international markets. Starting now, this is going to change.”
The sale of Ipiranga, to a consortium formed by Petrobras, Ultra and Braskem, was subjected to the scrutiny and critical analysis of five families and from 60 to 70 shareholders. During the weekend of March 18 and 19, the Gouvea Vieira, Tellechea, Ormazabal, Matos and Aguiar families all decided on the direction that the 70-year old company would take by participating in a teleconference on the subject. The deal still has to be approved by Brazilian anti-trust authorities, and negotiations must be concluded in the third quarter of this year.
This represents the second stage in the re-structuring of the Brazilian petrochemical industry. The first stage was in 2001, with the sale of the Copene petrochemical company. Now, with the arrival of Ultra Group, there is a company that distributes liquid petroleum gas (LPG) and is also active selling fuels (ethanol, diesel, and gasoline). “In the eyes of the petrochemical sector, this strengthens its power in the marketplace. Meanwhile, Braskem and Ultra begin to achieve enough scale to compete in global markets. The second important step should take place during the merger of those companies,” notes Almeida, who also runs the energy economics department at the same Brazilian university.
According to the terms of the agreement, Ultra Group will wind up with Ipiranga’s fuel distribution network in the south and southwest of Brazil. Petrobras will wind up with those businesses in the north, northeast and center-west regions. Ultra Group will continue to operate under the Ipiranga brand, but Petrobras will only be able to use the Ipiranga brand for five more years, as its BR brand gradually substitutes for the old Ipiranga brand in its gas stations. Control of the Ipiranga refinery in the state of Rio Grande del Sur will be divided equally between the three buyers who have committed themselves maintaining to that sector. Petrobras must spend $1.3 billion, while Braskem will pay $1.1 billion.
As for Ultra Group, it will have to purchase the shares of Ipiranga’s minority partners. When news of the deal spread, José Sergio Gabrielli, president of Petrobras, announced that the deal brings Petrobras into the petrochemical sector. “This opportunity to restructure the shareholdings of Copesul (one of the companies in the Ipiranga group) represents a significant step forward in the petrochemical sector, where Petrobras wants to achieve major strides in coming years.”
From the viewpoint of the distribution and resale of fuels, the acquisition inevitably reduces competition and strengthens Petrobras’ economic power to dictate market prices. The state-owned firm is the only company that operates in practically the entire production chain – production, refining and distribution. Now, it is in a position to set prices below those in the global marketplace. For example, Petrobras was able to able to avoid passing higher oil prices onto its consumers when the price of a barrel reached $77 in July 2006. In so doing, Brazil suppressed inflationary pressures that would have damaged the Brazilian economy. Moreover, the Petrobras deal makes it hard for potential competitors to get into this market.
According to Almeida, “The distribution segment has been experiencing a restructuring, because the presence of Petrobras prevents other companies from acting at every point in the chain. If a competitor decides to import or refine fuel, it runs the risk of winding up with a negative net margin, since Petrobras is in a position to lower its prices in the market.” Summing up, any possible concentration in the distribution market in the hands of a state-owned company is being viewed by its competitors as a “barrier to entry.” “Petrobras buys in order to strengthen the market, especially against the expansion of PDVSA, the Venezuelan state-owned company. That’s something that people are saying, but we cannot be sure. The fact is, in any case, that the market is in the hands of Petrobras,” says Almeida.
In a recent report, Fecombustibles, the Brazilian chamber of gas station owners, cited data collected by ANP, the national petroleum agency. The figures reveal how the trend toward “market concentration” was progressing at the end of 2006. Petrobras, through its BR-Distribuidora, its distribution subsidiary, led the country in gasoline sales with 24.29% of the market. It was followed by Ipiranga at 16.13% and by Shell at 11.08%. In the market for diesel fuel, BR has a 30.72% share, followed by Ipiranga at 22.76% and Shell at 11.68%. In ethanol sales, BR has 15.91%, Ipiranga has 11.23% and Shell has 8.96%. In February of this year, BR had a 16.7% share of the overall Brazilian fuel market.
Alisio Vaz, vice-president of Sindicom, the union of fuel distributors, has no comment to offer about how Petrobras’ monopoly will be strengthened. However, Vaz believes that the arrival of Ultra Group in the distribution sector is a positive factor for the entire system. “It’s been more than 10 years since we saw a major investor show confidence in the distribution sector. The environment was risky. Charges of fraud, fuel adulteration, and tax evasion frightened away companies. Now, with the government investing more in the sector, a more attractive environment is being created, along with the necessary mechanisms for [greater] efficiency.” Now the market for fuel distribution and sales in Brazil comprises Petrobras (through BR), Ipiranga, Ultra, Shell, Texaco, Esso and Repsol.
Damage to Competition?
The impact that all this might have on competition led to the intervention of CADE (the administrative council of economic defense). CADE is the arm of the Ministry of Justice that is responsible for making anti-trust decisions. The first step will focus on the acquisition by Ultra Group of the shares of the families controlled by the Ipiranga Group. During the second stage, Ultra Group will have to make a public offer for the ordinary shares owned by Ipirgana retailers. In a third stage, Braskem and Petrobras will have to make a proposal to shareholders about shutting down Copesul.
There two other aspects to this process. In the first stage, Ultra will incorporate the preferred shares owned by retailers of Ipiranga Brazil Petroleum Company, which owns the Ipiranga distribution network and Ipiranga refinery. These shareholders will have to receive preferred shares in Ultrapar (which belongs to the Ultra Group). In the final stage, petrochemical assets will be designated for Braskem and for Petrobras.
This level of control has become possible because of the power that state-owned Petrobras has in petroleum refining. This has enabled it to set prices at lower levels, given the concern by the Brazilian government (which is Petrobras’ largest shareholder) for dampening inflation. This happened even when there was upward pressure [on prices] in the international market. “It appears that CADE will play a more political role. You have to remember that this organization did not prevent Petrobras from entering the LPG (Liquefied Petroleum Gas) sector, which should have prevented this deal from happening,” says Almeida.
Market analysts believe that Petrobras and Braskem chose the Ultra Group with the sole intention of getting around any possible accusations that the deal might violate competition laws. These accusations could be made by the institutions that regulate competition, as well as capital markets. Ultra Group’s presence would enable Petrobras to sidestep any initial unhappiness, and any accusations of monopolistic activity in fuel distribution (on the part of Petrobras), and in the petrochemical sector (on the part of Braskem).
The negotiations took place behind the scenes, with scandals that included leaks of privileged information. Petrobras announced the creation of an internal commission for investigating and verifying the findings of the CVM (The Securities and Exchange Commission of Brazil) concerning the alleged leakage of privileged information. In an official note, the CVM announced that the manager of one of the companies that bought Ipiranga Group was blocked by BOVESPA, the São Paulo stock exchange, from accessing 295,000 reales that would have deposited in his account. However, CVM did not reveal the name of that company. The main person suspected of being this “insider” is a Petrobras manager.
This person is suspected of improperly using insider information to buy ordinary shares in the Ipiranga petroleum refinery on March 13 and 14, and then reselling those shares for a 70% profit on March 19, the day when the sale was officially announced. In February, this person had purchased preferred shares in the Ipiranga refinery on the BOVESPA exchange, using a margin account. Beginning on March 13, he got rid of all his preferred shares and bought ordinary shares that shot up in price following the sale of Ipiranga.
According to the CVM, the name of the executive was not on the lists of those who knew about the sale of Ipiranga and who were informed by the companies involved in the negotiations.
More than 100 people knew about the deal, including executives, bankers, accountants, lawyers and auditors. In addition to the Petrobras manager, two private individuals and investors from the state of Delaware had their accounts blocked because of suspicions that they were involved in this case. All told, 26 investors, including private individuals and legal entities, are being investigated by the Commission (CMV).