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Petrobras ‘Reverse Privatization’ Looms on Brazil

Petrobras slumped 29 percent this year, the second-worst performing major oil stock after BP Plc., on concern the sale will cut earnings and boost state interference after the company
discovered the largest oilfield in three decades. Photographer: Adriano Machado/Bloomberg
Petrobras slumped 29 percent this year, the second-worst performing major oil stock after BP Plc., on concern the sale will cut earnings and boost state interference after the company discovered the largest oilfield in three decades. Photographer: Adriano Machado/Bloomberg

Sept. 23 (Bloomberg) -- Brazil is reclaiming part of the Petroleo Brasileiro SA stake it sold to investors a decade ago in a record $78 billion share sale today.

The government will boost its stake in Petrobras, Latin America’s largest company by market value, to as much as 55 percent from 39 percent now, Adriano Pires, head of the Brazilian Center for Infrastructure, a research group based in Rio de Janeiro, said yesterday in a telephone interview.

Petrobras slumped 29 percent this year, the second-worst performing major oil stock after BP Plc, on concern the sale will cut earnings and boost state interference after the company discovered the largest oilfield in three decades. The Petrobras transaction signals President Luiz Inacio Lula da Silva is seeking a greater role for the state in the economy before the likely election of chosen successor Dilma Rousseff next month.

“Many are worried Petrobras is really becoming a policy arm of the Brazilian government,” Harold Sharon, who helps manage $100 billion including Petrobras shares at Lord Abbett in Jersey City, said in an interview. “As they sit back and look at this entire development, it looks far too interventionist.”

Petrobras is planning to sell as many as 2.718 billion common shares and 1.983 billion preferred shares. The government is buying about $42.5 billion-worth of stock in return for the right to develop about 5 billion barrels of reserves. State-run financial institutions such as the BNDES development bank will likely buy additional shares for cash, UBS AG said Sept. 21.

Shares Rise

Petrobras rose 82 reais, or 3.2 percent, to 26.80 reais at 5:09 p.m. in Sao Paulo trading on speculation demand for the share sale will exceed $78 billion. The stock declined about 27 percent this year.

Petrobras’s board of directors will meet in Sao Paulo today to approve the price of the shares in the sale, said a company spokeswoman, who declined to be named because of company policy.

The Petrobras sale would amount to more than 20 percent of the value of all equity offerings already completed in 2010 and be more than three times the record $22.1 billion raised by Agricultural Bank of China in July, according to Bloomberg data.

Lula is strengthening control over the domestic oil industry after the Tupi discovery in 2007, the largest find in the Western Hemisphere since Mexico’s Cantarell in 1976. Lula says Brazil is relying on the country’s oil wealth to help raise the nation’s 192 million people out of poverty.

‘Reverse Privatization’

“It’s a clear process of reverse privatization,” Rogerio Freitas, who manages about $25 million at Teorica Investimentos in Rio de Janeiro, said in a telephone interview. “The Brazilian public sector will increase its participation, and that’s not good.”

The government and state agencies will buy 56 percent to 69 percent of the offering, allowing Petrobras to place all the shares, Lilyanna Yang, an analyst at UBS AG in New York, said in a Sept. 21 note to clients.

Telephone messages left at Lula’s press office in Brasilia were not returned. A spokeswoman at Petrobras’s press office, who declined to be identified under company policy, wouldn’t comment on the prospect of increased government control.

Controlling Commodities

Brazil, the world’s largest producer of orange juice and coffee, is taking advantage of rising prices to exert greater control over commodity companies. Lula has asked Vale SA, the world’s largest iron ore company, to invest in steelmaking plants in Brazil instead of sending iron ore abroad, while Dilma, a former Petrobras chairman, said Vale should face tougher requirements for tapping Brazil’s natural resources, according to a February interview with Epoca magazine.

Dilma “has a very state-orientated discourse,” Roberto Padovani, chief economist at Banco WestLB do Brasil SA in Sao Paulo, said in a Sept. 22 telephone interview.

Brazil’s government owns a 32 percent stake in Petrobras and controls the company through 55.6 percent of voting shares. The government holdings of Petrobras’s voting shares will probably rise to about 65 percent after the share sale, according to the Infrastructure Institute’s Pires.

Previous governments “only went to the stock exchange to sell public companies,” Lula said Sept. 21 at a railway inauguration. “I will go to the stock exchange to capitalize Petrobras.”

‘Richer, More Powerful’

“Petrobras will be richer, more powerful and stronger, and consequently Brazil will richer, more powerful and stronger,” he said.

Since the government sold more than a quarter of Petrobras’s shares for about $4.1 billion in 2000, the company has invested in boosting the search for oil. State-owned rivals Petroleos Mexicanos and Petroleos de Venezuela SA struggled to stem declines and Pemex posted five straight years of lower output. Petrobras expects to double output by 2020.

Brazil’s development bank, known as BNDES, will buy enough shares in the Petrobras offer to maintain its shareholding, Andre Carvalhal, head of the international market department at BNDES, said in a Sept. 15 interview. BNDES is the second-largest shareholder in Petrobras after Brazil’s government.

About $379 billion has been raised by companies selling shares this year, the same pace as a year ago, data compiled by Bloomberg show. A total of 167 equity offerings valued at $29.5 billion have been postponed or withdrawn around the world this year, the most since at least 1998, the data show.

Favoring the State

The share sale is putting the state’s interests above those of minority shareholders, said Ed Kuczma, an emerging markets analyst at Van Eck Associates in New York, which manages $21 billion and sold Petrobras shares this quarter.

“We vote with where we put our funds and decided to get out,” Kuczma said in a telephone interview. “A lot of the investment is going toward downstream facilities like refining, which tend to have lower returns.”

Petrobras will need $90 billion in financing over the next five years on top of the estimated $35 billion in cash it will raise from minority shareholders in the offering, Standard & Poor’s said in an e-mailed statement.

Petrobras plans to spend $73.6 billion on refining and distribution in the five years through 2014. Profit margins there are typically lower than in its exploration and production business. That’s about one third of planned spending of about $224 billion. The company will “assist” the government in meeting Brazilian fuel demand, it said in a Sept. 3 prospectus.

“This big offering is coming at a time when there’s more concern about the government moving to the left,” said Nick Robinson, who helps manage $25 billion in emerging-market assets at Aberdeen Asset Management Inc. and owns Petrobras shares. “Most of the refineries are in the north and the current government gets most of its support from the north.”

Fueling the Economy

Brazil ended Petrobras’s monopoly on exploration and production in 1997 to create competition and encourage the discovery of oil to fuel the domestic economy. The company also sold shares to finance exploration, with the government retaining control of the company’s voting shares.

“The Brazilian federal government, as our principal shareholder, may cause us to pursue certain macroeconomic and social objectives,” Petrobras said in a Sept. 3 prospectus. “We may engage in activities that give preference to the objectives of the Brazilian federal government rather than to our own economic and business objectives,” the company said.

Petrobras on Sept. 17 doubled the amount of stock that can be issued in an additional allotment to as much as 20 percent of the main sale. That’s on top of an already announced supplementary over-allotment of as much as 5 percent.

The offering has “very strong support from domestic pension funds and the government,” Christopher Palmer, who oversees about $5 billion as head of global emerging markets at Gartmore Investment Management Ltd. in London, said in a Sept. 21 telephone interview. “The government thinks this is a good investment.”

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To contact the reporter on this story: Peter Millard in Rio de Janeiro at

To contact the editor responsible for this story: Dale Crofts at

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