Odebrecht Said to Plot Survival Plan After Record Graft Fine

  • Brazil giant agrees to pay $3.5 billion in deal with U.S.
  • Conglomerate said to focus on two units: building arm, Braskem

In better times, the Brazilian construction giant Odebrecht SA’s annual planning powwow was a grand affair taking place over several days at exotic five-star resorts for a few hundred directors and their families. These days, there’s no posh digs. No luxury meals. And absolutely no spouses or kids.

When executives gathered at the conglomerate’s Salvador headquarters late last year, their ranks had atrophied by about half. Five of the missing directors were in jail or under house arrest as part of Brazil’s biggest-ever corruption investigation; 72 others were negotiating plea bargains on charges the company paid bribes to win lucrative construction contracts and then inflated costs. The rest were victims of Brazil’s worst recession in at least a century. For those who remained, there was only one topic on the agenda: Survival.

In the mid-December meeting, the sprawling organization outlined a plan to focus on just two business sectors: the construction arm and petrochemical producer Braskem SA, which together account for 84 percent of the group’s revenue, according to three people with direct knowledge of Odebrecht’s multi-year strategic plan. A major step will include selling more assets than previously announced and winning new construction contracts, with much of the effort targeted in foreign countries where Odebrecht’s image isn’t so badly damaged, said the people, who asked not to be identified because the plan isn’t public.

“The building unit and Braskem are the principal assets of the group, so it makes sense they’d focus all their efforts on making sure those two pillars work,” said Alexandre Garcia, a senior analyst at Fitch Ratings Ltd. in Sao Paulo who hasn’t seen details of the plan. “The main issue is the builder’s renewal of its backlog, and that’s just not happening yet.”

Odebrecht holds a 50.1 percent voting stake in Braskem. Petroleo Brasileiro SA, the state oil giant that granted many of the inflated contracts to builders, owns 47 percent of the common shares.

The strategic plan would mark a further whittling down of the building behemoth, which operates in 26 countries through 12 business lines ranging from agriculture to energy and defense. Already, Odebrecht has sold 5 billion reais ($1.6 billion) of the 12 billion reais in assets it put up for sale to ease a cash crunch in 2016, and reduced the size of its workforce by almost 60,000 people to 128,000 in the three years through 2015, the press office said. The efforts have allowed it to lower its debt load by almost 15 percent to 95 billion reais in the six months through June 2016.

“Odebrecht intends to maintain its business in markets where it operates, including abroad while also strengthening operations inside Brazil,” Odebrecht’s press office said in an emailed response to questions, while declining to confirm details of the strategic plan. It said it hasn’t held its annual meeting at a five-start resort since 2012. “The assets that are currently being sold are primarily related to segments with greater liquidity or those that hadn’t become business focuses.”

Odebrecht was prohibited from bidding on new public-works contracts in Brazil for much of the almost three-year investigation known as Carwash. The backlog at the company’s Odebrecht Engineering & Construction unit, which measures projects for which Odebrecht was contracted but hasn’t yet finished, is estimated to have shrunk by about 40 percent from the previous year to about 64 billion reais in 2016 and will probably stay flat this year, Fitch Ratings forecasts.

Odebrecht, which previously denied any wrongdoing, and Braskem reached an accord in December with U.S. authorities to pay more than $3.5 billion -- the biggest penalty on record -- for violating the Foreign Corrupt Practices Act. While the agreement paves the way for Odebrecht to start bidding on public contracts again in Brazil, the admission of wrongdoing also introduced new information that spurred other governments including Peru and Colombia to open their own investigations. In December, Panama prohibited Odebrecht from bidding on any more contracts there until it reimburses the government for any alleged losses.

Fitch Ratings downgraded Odebrecht Engenharia & Construcao on Tuesday to CC from B-, citing "substantial challenges" that the company faces in 2017 to restructure its activities and recover its cash flow generating capacity. Fitch said in a statement that additional information released by the U.S. Department of Justice exacerbates the company’s “reputational risk.”

Rebuilding that backlog remains the key challenge going forward, Fitch’s Garcia said. In Brazil, the company plans to prioritize contracts with private companies instead of state-run entities, according to the people familiar with the December meeting.

“If there are no new infrastructure projects for Odebrecht to execute around the world, if the company isn’t called or invited to bid on them anymore, there’s a big chance it will fail,” he said.

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