Batista’s Losers Shout and Sue as OGX Meltdown Casts PallJuan Pablo Spinetto, Peter Millard and Ken Wells
The 23-story Serrador building rises gracefully in downtown Rio de Janeiro, a rounded granite-and-glass art deco masterpiece that conjures the opulence of another era. Completed in 1944 and named for Spanish cinema-house promoter Francisco Serrador, it once held a luxury hotel with a nightclub that attracted a mix of Rio elites and visiting American movie stars.
The Serrador had fallen on hard times in recent decades, only to find a patron: Brazilian billionaire Eike Batista. In 2011, with Batista’s financial empire in full glory, he leased the luxuriously remodeled complex to house his alphabet soup of companies -– EBX, MMX, OGX, among them -- and provide him a penthouse view of the city befitting his status as one of the world’s richest men. His helipad sat just one flight up.
These days the Serrador looks very much like a building in relapse. Shattered art-glass windows fronting the lobby remain unrepaired since October –- victims of two waves of protesters targeting capitalism in general and Batista as capitalism’s new despised face. The facade has been badly damaged by flying objects. Battered pieces litter the ground.
Entry now is through a side door just off a narrow, dark street where beggars dig through garbage bins and homeless men sleep the day away. Inside, its lights dimmed, the marbled halls of its lower floors empty and echoing, the Serrador seems to exude the melancholia and distress that’s befallen Batista himself. His drastically shrunk operations have largely moved out, seeking cheaper digs.
And there’s something else here: anger.
Batista, the world’s eighth richest man a little more than 18 months ago, is no longer a billionaire. In late October, OGX Petroleo & Gas Participacoes SA, the oil and gas exploration company he once controlled, filed for bankruptcy protection in a Rio court. The move was precipitated by the collapse of OGX shares as the company said that production from a cluster of wells it had once touted as a “new frontier” of oil would fall severely short of estimates.
The debacle wiped more than $34 billion from Batista’s personal wealth and billions more from the value of bonds and stocks held by investors. It’s the largest corporate default in Latin American history. The meltdown also sent economic, political and cultural shock waves through this scenic, sybaritic city –- its favorite son now tabloid fodder, embarrassing both the political class who had embraced him and hometown investors who face large losses and even ruin.
“Eike’s exit hurts. There’s no substitute for him in Rio, the role he was doing for years sponsoring the city,” said Adriano Pires, the head of the Brazilian Center for Infrastructure, a Rio-based consulting firm. “He had dozens of projects generating employment and he also helped project on the national and international stage.”
Neither Batista’s nor the company’s press officials responded to multiple phone calls and e-mails seeking comment for this story.
Some of those burned investors came on a sweltering December day a week before Christmas to vent and try to get answers as to how Batista and OGX could have gotten it so wrong. In a high-tech third floor conference space named the Jutta Batista Virtual Reality room for Batista’s mother, the Serrador’s tomb-like quiet gives way to periodic waves of incredulity and recrimination.
Paulo Narcelio, who in September became OGX’s fourth CEO in less than two years, fielded a barrage of shareholder questions. Some cling to one sliver of hope: an OGX oilfield known as Tubarao Martelo may actually hold generous recoverable reserves -– unlike the fields that turned out to be such duds that news of their failure precipitated the OGX collapse.
At one point, Batista had touted reserves of 10.8 billion barrels of oil, which he valued at $1 trillion, but later was forced to hang a giant asterisk on the number since little of that is recoverable.
The company, since renamed Oleo & Gas Participacoes SA, reached an agreement Dec. 24 to convert debt of about $5.8 billion into a 90 percent stake, effectively ending Batista’s control. The deal may allow Oleo to emerge from bankruptcy. And should Tubarao Martelo prove to be the real thing, company shares, which lost 95 percent of their value in the past year, might see a modest recovery. They closed out the year at 0.24 reais.
“Why can’t we get the production numbers?” one man shouted at Narcelio, noting news that the fields began producing earlier this month.
Narcelio demurred, saying the company can ill afford the ramifications of any “market speculation” that might occur should the real numbers not live up to projections. This prompted another investor to mutter under his breath that the figures “will get leaked anyway.”
Another demanded to know why contracts OGX awarded to its sister company OSX Brasil SA, Batista’s ship-building enterprise, were drastically written down when OSX was valuing them at billions of dollars above OGX valuations. Narcelio sidestepped the question. The two companies last week agreed on a $1.5 billion valuation, with OSX forgiving the debt in exchange for seven percent of the oil company’s shares.
A third investor asked about a $1 billion put option that Batista pledged to OGX should it encounter financial strains. Narcelio said he couldn’t be drawn into the controversy. As it turns out, the put was extinguished in the Dec. 24 debt-for-equity deal –- announced just before 9 p.m. on Christmas eve while most Brazilian families were celebrating. Narcelio endured the sometime tense grilling for an hour, calling it “an obligation” to the thousands of shareholders who have been hurt.
A few people in the audience applauded the effort. Others were less persuaded. “I didn’t end up satisfied,” shareholder Ivan Garcia Diniz said after the meeting. Diniz, who declined to discuss his losses, said Batista isn’t dealing forthrightly with burned investors, citing the valuation issue of the OSX contracts. “This is a Catch-22 created by Mr. Eike Batista,” he said.
In Jardim Botanico, a manicured section of Rio where elegant homes overlook the city’s lagoon, one tiny part of the Batista empire still thrives: Mr. Lam, the airy, pricey Hong Kong-style Chinese restaurant Batista opened six years ago.
It’s not every Chinese restaurant that sports $1,100 bottles of wine and $76 dishes of Peking duck. The prices don’t chase people away. As a September reviewer on Tripadvisor.com wrote, “Even if Mr. Eike Batista’s other investments seem to be going down the drain, this one’s still going strong.”
In the glory days, Batista ate there twice a week –- a favorite dish seemed to be one named after himself, “Mr. Batista’s Prawns” for $42, no sides included. The problem, with his empire unraveling, is that vulture capitalists circle overhead, thinking sooner later he will have to liquidate it all, including his beloved restaurant.
According to local press reports, he’s been pressured to sell Mr. Lam. So far he is holding out, though wariness of such inquiries may explain why his visits there are rare these days, according to these press accounts.
Still, a man has to eat and a public that used to crave pictures of Batista awash in success –- posing with President Dilma Rousseff, at home with his $500,000 Mercedes-Benz SLR McLaren –- now has a different appetite. Thus the Extra, a popular Rio tabloid that chronicles the rise and fall of celebrities, recently published a photo purported to be Batista, dressed in black and standing alone at the cash register of a Bob’s burger joint –- a down-market eatery that’s the Brazilian equivalent of a McDonald’s Corp. franchise.
Not that long ago, Batista was hailed as the embodiment of a Brazilian economic miracle, a Latin Midas.
“Our Eike is the Brazilian Bernard Madoff. Everything he said was a lie.”
That’s Marcio de Melo Lobo, a lawyer who has long followed Batista’s career. Reading Batista and OGX pronouncements about that new frontier of oil, he decided to invest big. About 50,000 individual investors put their money in OGX.
Batista has denied misleading investors. In an open letter to shareholders in July, he said the collapse of the company has affected him more than anyone else.
“Does someone who wishes to mislead the other do so at a cost of billions of dollars?” he said. “Who lost the most with the collapse in the value of OGX was one shareholder: Eike Batista. No one has lost as much as I did, and it is fitting that it be so.”
Concerns that OGX’s estimates were overinflated turned to outright alarm on July 1 when Lobo awakened to news that starkly contradicted the original rosy announcements. The company scrapped all production targets on most of its offshore oil holdings, declaring that it had badly misjudged the geology and the oil that might be there would be impossible to pump out in commercial quantities.
Shares plunged 29 percent on that news, bringing the Rio-based lawyer’s losses in OGX to roughly 625,000 reais ($265,000). Toth Brondi Rezende, the owner of a Rio-based film studio, said he bought twice as many shares as Lobo.
Lobo went to court days later, seeking an injunction to block OGX from selling assets and making payments to other companies in Batista’s industrial group.
A judge threw out that suit July 11 on grounds that Brazilian law didn’t allow an asset freeze under such circumstances. Lobo said he remains incredulous, and bitter, at what he called a deception. “A month earlier they said the wells were viable” and suddenly they are duds, said Lobo. “It doesn’t make sense.”
On Dec. 6, Lobo, Rezende and two other shareholders went back to court seeking damages and reimbursement. They cited, among other things, stock market filings that show Batista unloaded shares of OGX earlier this year in the run up to project cancellations and the subsequent filing for bankruptcy protection.
Batista told his Twitter followers in March to hang on, vowing short sellers would get caught “with their pants down.” In May, just five weeks before the fateful announcement about production shortfalls and the month when Batista began to sell his own OGX holdings, he posted, “patience is part of the game.”
“It confounds me that this happens in Brazil in 2013 and nobody does anything,” Rezende said. “I understand very well how you can win and lose in the market, but things happened outside of what is normal.”
And then there are investors like entrepreneur Edson Fonseca, who still think OGX may pull out of the economic crater Batista created.
The 43-year-old ad agency owner from Sao Paulo made his first significant investment in OGX, about 20,000 shares, in May 2012. Fonseca has a long view about oil -– prices will eventually rise, he said -– and OGX and Batista seemed to share his vision. Having seen OGX trading as high as 23 reais, he thought an entry point slightly above 13 reais would be a good investment for about 265,000 reais. Just days later, the stock went into free fall. While Lobo and others began to flee and sue, Fonseca had a different idea: he doubled down, buying many more shares.
“The shares were falling and I was buying, building a position and believing in the comeback of the company,” Fonseca recently said over coffee in Rio. “I picked exactly the start of the downfall.” His position now? He owns 3.2 million OGX shares –- about 0.1 percent of all outstanding shares -- worth about 768,000 reais. He declined to estimate his losses.
Fonseca said he’s still trying to sort out what the Dec. 24 debt deal means for his holdings. He’s also hoping the start of production at the Tubarao Martelo field will pay off.
“I bet on the recovery of the company,” he said. “In the medium to long term, it is a company that will pay off.” Was there ever a glimmer of doubt? Fonseca said he was rattled when OGX filed for bankruptcy protection in October. Batista “got to a point when in my opinion he stopped believing in his own business,” he said.
Joao, however, will not be doubling down. Well, not again. He bought OGX shares for the first time in December 2012.
A 40-year-old Brazilian living in London for the past ten years, he was certain he had spotted a bargain. OGX was trading at a 4-year low after disclosing negative production data. He thought OGX had put its bad news behind it. He took a good portion of his savings and bought 20,000 shares with them.
Even as the stock continued to slide for the next three months, he continued buying shares, tripling his position. He had sold off a parcel of land he inherited in Brazil from his father and decided to put the proceeds in OGX as well. He thought he had a reassurance: Twitter. He had seen Batista shrugging off investors’ concerns and posting positive messages on the social network, cheering his enterprises and saying that any drawbacks would be temporary as profitable startups aren’t built overnight.
“In my mind, there was no way a man that almost became the world’s richest person would put his credibility at play the way he did,” he said. Joao talked about this reluctantly and asked that his real name not be used. He hasn’t yet disclosed his losses to his wife. He’s out about $80,000. He’s squandered the land inheritance from his father. He no longer has the down payment for the European flat he and his wife were planning to buy. He’s deeply embarrassed though confident his marriage will survive this shock.
It was a hard lesson to learn. “Nowadays I don’t believe in OGX anymore,” he said. “I don’t believe in Eike, I don’t even think the company will exit the judicial recovery.”