Petrobras Activists Winning Fuel Battle Signal New Tone

Petroleo Brasileiro SA minority shareholders are poised to secure their first victory after winning a board seat in April.

Months of lobbying by investors led by Aberdeen Asset Management Plc spurred Energy Minister Edison Lobao’s assurance on Oct. 14 the government would let state-run Petrobras raise gasoline prices, after fuel subsidies caused 6.77 billion reais ($3.15 billion) in first-half net losses at the refining unit.

The Petrobras case shows how minority investors in Brazil, the world’s second-largest developing economy, are increasingly seeking a voice in management and strategy after long shunning such activism. They’re making themselves heard at some of Brazil’s biggest companies, said Jose Carlos Reis de Magalhaes, founder and chairman of Tarpon Investimentos SA, which pushed for a new board president at foodmaker BRF SA this year.

“In recent years, we’ve seen the strengthening of both local and foreign investor involvement,” said Pedro Rudge, a partner at Rio de Janeiro-based Leblon Equities, which has won board seats at Saraiva SA and Springs Global Participacoes SA and shaped strategy at both companies. “This year, big investors have begun participating in meetings.”

Such activism follows a push in the U.S. by investors chasing ever-larger companies, from Microsoft Corp. to Apple Inc. Companies with a market value of more than $10 billion accounted for 5.7 percent of targets this year, more than double 2010’s level, according to researcher Activist Insight.

Activism Study

The Brazilian investors association is studying behavior on boards and at shareholder meetings to determine the level of activism among minority shareholders, President Mauro Cunha said. Amec, as the group is known, says its ranks jumped almost 80 percent to 62 members since 2006.

The boardroom struggle at Petrobras came amid President Dilma Rousseff administration’s reluctance to raise fuel prices on concern such a step would slow consumer spending. Brazil’s economy may grow at a 2.48 percent rate in 2013, according to an Oct. 11 central bank survey of economists, down from 3.26 percent in the first survey of the year.

For minority shareholders, charging more for gasoline became urgent as profits at the Rio de Janeiro-based company tumbled 36 percent in 2012 to 21.2 billion reais. Aberdeen championed the appointment of Cunha as a director, making him Petrobras’ first minority shareholder representative. This week, Energy Minister Lobao signaled that prices were going up.

“We’re confident that a new increase in fuel prices will eventually happen,” he said in Brasilia. Petrobras rose 0.7 percent to 18.33 reais at 12:45 p.m. in Sao Paulo trading.

Profit Boost

A 5 percent increase for gasoline and diesel would produce a 1 percent boost in Petrobras’ 2014 estimated net revenue while raising estimated profits 10 percent, Caio Carvalhal, a JPMorgan Chase & Co. analyst in Sao Paulo, wrote in an Oct. 9 report.

“The activism on Petrobras worked out quite well,” said Nick Robinson, head of Brazilian equities at U.K.-based Aberdeen, which manages about $15 billion of Latin American shares. Petrobras didn’t respond to requests for comment.

“Some companies understand completely the benefits of good governance,” Robinson said in a telephone interview from Sao Paulo. “Some companies don’t have that view because they may have a controlling shareholder that doesn’t have the same interest as the minority shareholders.”

Springs Global

Among the highest-profile examples of shareholder activism was Leblon Equities’ entry onto the board of textile maker Springs Global in April 2012.

With a 25 percent stake in Springs Global, Leblon Equities seated two directors and helped the Montes Claros, Brazil-based manufacturer recast itself as a retailer, said Marcelo Mesquita, a fund manager at the firm who helps oversee 670 million reais. Springs Global had 229 sales outlets, including e-commerce points, by the end of the second quarter, according to a company statement.

“We enter companies that we think are very cheap that somehow the market is not seeing the value that they can have in the future,” Mesquita said by telephone from Rio de Janeiro. “Usually this value comes from a transformation. If things stay the same, it’s unlikely that the stock will move.”

Springs Global should return to profit next year, according to Mesquita. Pedro Baptista, a Nau Securities Ltd. analyst, projects 2014 net income of 49 million reais. The company didn’t respond to requests for comment.

Stock Slump

While that would end net losses dating to 2010, shareholders aren’t yet betting on a rebound. The stock tumbled 31 percent this year through yesterday, trailing the 9.2 percent drop for Brazil’s benchmark Ibovespa index. Springs Global closed at 2 reais.

The new stirrings of shareholder activism mark the latest steps in an evolution in Brazilian corporate governance that includes the creation the Novo Mercado in 2000. It’s the segment of the stock exchange with the highest governance standards, including a one-share, one-vote rule.

Investors are still learning how to navigate boardrooms, said Guilherme Affonso Ferreira, who is chief executive officer of closely held investment firm Bahema Participacoes SA and serves as a director at publicly traded companies including supermarket chain Cia. Brasileira de Distribuicao Grupo Pao de Acucar and homebuilder Gafisa SA.

“It still hasn’t reached an ‘optimum’ level, we’ve got a long way to go,” Ferreira said by telephone from Sao Paulo. “Some funds are activists, but I’d say that the bulk of resources are allocated to funds that want to keep a distance.”

Diving In

Tarpon Investimentos isn’t reluctant to get involved.

The fund, which is focused on long-term investments, joined with pension fund Caixa de Previdencia dos Funcionarios do Banco do Brasil this year to get former Pao de Acucar Chairman Abilio Diniz elected to lead the board at BRF, Brazil’s biggest food company.

Annual sales gains at Sao Paulo-based BRF slowed to 13 percent or less starting in 2011 after growth of at least 40 percent in each of the preceding three years, according to data compiled by Bloomberg, and the two outside investors sought to spur growth and increase efficiency.

BRF has announced management changes, and new CEO Claudio Galeazzi said on Aug. 14 that he’s considering selling forest assets and poultry farms.

“Activism not only changes status quo and brings new proposals,” Tarpon Investimentos’s Magalhaes said. “It also takes responsibility for what it does and is conscious of the impact it creates.”

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