Eike Batista, the Brazilian billionaire who sold a $2 billion interest in his commodities empire to Abu Dhabi’s Mubadala Development Co., pledged an additional stake that shields the fund from the selloff in his publicly traded companies, according to a person familiar with the transaction.
Batista, under terms of the sale of 5.63 percent of his EBX Group Co. in March, agreed to turn over an unspecified stake in 2019 if he fails to deliver a 5 percent annual return on the sovereign-wealth fund’s investment, the person said, asking not to be identified because the details are private. The person declined to say how the target is measured.
The deal, which Batista, 56, championed as a sign of investor confidence in his interlinking natural-resource and logistics startups, helps preserve Mubadala’s investment if EBX fails to grow or loses value. It also puts Batista’s holdings at risk after his publicly traded companies lost about half their value this year following delays and missed output goals.
“This looks less favorable for Eike than just signing a check,” said Eric Conrads, who manages $750 million in Latin American stocks at ING Investment Management in New York and declined to say whether he oversees shares in Batista’s companies. “Eike has to share some of the goods on the upside and he suffers more on the downside. It’s asymmetric.”
Mubadala took a “preferred equity interest” in Batista’s Centennial Asset Brazilian Equity Fund LLC and other offshore vehicles, according to a joint statement in March. The deal gave the fund 5.63 percent of each of Batista’s stakes in his publicly traded and closely held companies, and the same percentage of any new ventures. It also gave Mubadala “certain rights and protections,” they said, without giving more detail.
Batista, who sold an additional 0.8 percent preferred equity stake in EBX to General Electric Co. for $300 million in May, has the option in 2014 to buy back half the holding sold to Mubadala, according to the person.
Press officials at EBX in Rio de Janeiro and Mubadala in Abu Dhabi declined to comment on the deal’s structure, referring questions to the March statement announcing the deal.
Mubadala extended a 7.35 billion-dirham ($2 billion) loan to an undisclosed third party secured by “listed securities and guarantees,” according to its first-half financial report. The deal carries a “minimum assured return,” matures in 2017 and can be extended by Mubadala for an additional two years, according to the release.
Loan to EBX
That transaction is the EBX preferred equity security and is booked as a loan for accounting reasons, according to a person familiar with the fund’s finances, who declined to be identified because details of the deal aren’t public.
Two banks with knowledge of the deal consider it a hybrid between equity and debt, two other people said. One of the banks, which lends to EBX, treats it as a loan when gauging the credit quality of Batista’s group, said one of the two people.
“We just wanted to have maybe an extra stamp,” Batista said of the deal with Mubadala in an April 30 interview with Bloomberg Television. “When somebody like Mubadala comes in, the world knows how deep they go into the auditing process.”
The announced terms of the deal with Mubadala valued Batista’s empire at $35.5 billion, including publicly traded and closely held units. His stakes in his six listed companies now have a combined market value of $8.4 billion, down from about $19.5 billion at the end of 2011. The selloff deepened in June when his flagship oil producer OGX Petroleo & Gas Participacoes SA cut its initial production targets less than five months after pumping its first barrel of crude.
OGX, Batista’s biggest holding, rose 0.6 percent to 4.73 reais at the close in Sao Paulo today. It’s declined 65 percent this year.
Batista’s six publicly traded companies, based in Rio de Janeiro, had a combined net loss of 1.68 billion reais ($808 million) in the first nine months, according to data compiled by Bloomberg. After losing the title of Brazil’s richest person to Anheuser-Busch InBev investor Jorge Paulo Lemann last month, Batista reclaimed his spot on Dec. 7, according to the Bloomberg Billionaires Index. He’s now worth $19.5 billion.
“All of EBX’s publicly traded companies are fulfilling their business plans,” and are well funded for coming years, Batista’s holding company said in an e-mailed statement. The conglomerate has close to $9 billion in cash, and its units will increasingly begin to generate revenues starting in 2013 and 2014, EBX said. Batista’s planned cash injections for OGX, shipbuilder OSX Brasil SA and iron-ore miner MMX Mineracao & Metalicos SA demonstrate his confidence in his companies, according to the statement.
The billionaire is in talks to issue new shares in his listed companies to the equity arm of Brazil’s state development bank, known as BNDES, Veja magazine reported Dec. 8. EBX said Dec. 10 that there’s no formal agreement for a cash injection from BNDES.
If the Mubadala deal “were pure equity without debt, it might have been a better deal for him,” said Marcelo Mesquita, a former co-head of Brazilian equities at UBS AG who now manages 600 million reais as founding partner at Leblon Equities in Rio. “It’s riskier because there could be another global crisis or Brazil’s growth might disappoint. He always shows a lot of confidence in his companies.”