Suzano Petroquímica and the
Acquisition of Polibrasil
Prepared by:
Daniel Sensel, Ernesto Knizek,
David Nuñez, Alvaro Pipino, Emilio Baltodano
Presented on:
February 28, 2006
1
Case Outline
•
•
•
•
•
•
•
•
Overview of the Case
Learning Objective
Information about Brazil
Petrochemical Industry
International Finance Corporation (IFC)
Cost of Capital
Valuation
What Happened
2
Overview of the Case
• Suzano Petroquímica
– One of Brazil’s leading petrochemical companies
• Structured as a holding company
– Began in 1974 through investments by Suzano Papel e
Celulose in the petrochemical industry
– Net Sales of R$1,610M in 2004 (~ US$600M)
• Investment Opportunity
– Acquire remaining 50% stake in Polibrasil, currently a joint
venture with Basell International
– Polibrasil is the largest producer of polypropylene in Latin
America
• Annual production capacity of 625 ktons of polypropylene
– Debt financing required
3
Key Questions to Consider
• What are the strategic considerations to pursue the
merger?
• What is the role of the International Finance
Corporation (IFC) in supporting the project?
• What is the cost of capital?
• What is the value of Polibrasil?
4
Case Outline
•
•
•
•
•
•
•
•
Overview of the Case
Learning Objective
Information about Brazil
Petrochemical Industry
International Finance Corporation (IFC)
Cost of Capital
Valuation
What Happened
5
Brazil - A Brief History
•
11th largest economy in the world as of 2004
– GPD of US$785B in 2004
•
2002 - Brazil affected by Argentinean collapse
– Country Risk reaches all time high (see next slide)
•
2002 - Left-wing party candidate, Jose Ignacio “Lula” da Silva wins
presidential elections
– Surprises skeptics by maintaining fiscal discipline, low inflation
targets and favorable environment for foreign investors
•
2003-2005 – Brazil has shown stability and resumes growth
– 4.9% GDP growth in 2004
•
June 2005 - “mensalão” political scandal erupts and threatens the
presidency of Lula
6
ARGENTINA
BRASIL
7
MEXICO
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Oct-01
Jul-01
Apr-01
Jan-01
Oct-00
Jul-00
Apr-00
Jan-00
Basic Points
Latin America – Not for the faint of heart
Latin American Sovereign Risks
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Case Outline
•
•
•
•
•
•
•
•
Overview of the Case
Learning Objective
Information about Brazil
Petrochemical Industry
International Finance Corporation (IFC)
Cost of Capital
Valuation
What Happened
8
Brazilian Petrochemical Industry
1st
Generation
2nd
Generation
Polibrasil
9
3rd
Generation
2nd Generation Producer
• Currently a “fragmented” industry, with over 50
producers
– Consolidation already under way
• Petrobras is the main supplier of raw materials
(naphtha)
– Raw materials make up 70% of COGS
• Currency risk is hedged in the medium/long run
Opportunity to become a consolidator in the
petrochemical market
10
Suzano Petroquímica – Holding Company
• Opportunity to simplify the organizational structure
• Bring company closer to capital markets
11
Polypropylene – Strong market potential
• High correlation between petrochemical demand
growth and GDP growth.
– elasticity is estimated to be from 3.0 to 4.7x
– GDP projections of >4% CAGR
• Low penetration rates
12
Demand vs. Capacity
Projected Demand for the Main Thermoplastic Resins (kton)
Year
Total PE PP
PET
PVC
PS
2006
1935
1331
560
766
331
2007
2163
1528
631
848
359
2008
2419
1755
711
939
390
2009
2724
2030
807
1046
425
2010
3088
2366
922
1171
465
2011
3500
2755
1052
1311
508
2012
3969
3208
1200
1467
556
2013
4503
3735
1369
1642
608
CAGR 06-13
12.8%
15.9%
13.6%
11.5%
9.1%
Total Resins
4923
5529
6214
7032
8012
9126
10400
11857
13.4%
Source: Espirit Santo Research
National Capacity of Polypropylene
Company
Capacity (ktons)
Polibrasil
625
Braskem
550
Ipiranga
150
Total
1,325
%
47.2%
41.5%
11.3%
100.0%
Source: BNDES
A lot of opportunity, but significant
investment required
13
Case Outline
•
•
•
•
•
•
•
•
Overview of the Case
Learning Objective
Information about Brazil
Petrochemical Industry
International Finance Corporation (IFC)
Cost of Capital
Valuation
What Happened
14
Significant Investment Required
• BNDES (National Development Bank)
– “Considering that the sustained growth of the economy will
required investments in production capacity of
approximately $12B to meet internal demand for
petrochemical products throughout 2013.”
– It becomes essential the provision of funds to make viable
the realization of the different proposed projects, with the
support of the BNDES, and other institutions such as the
BID, IFC, CAF, and export credit agencies.”
15
International Finance Corporation (IFC)
• IFC is a member of the World Bank Group
• IFC’s mission is to promote sustainable private
sector investment in developing countries, helping
to reduce poverty and improve people’s lives
In order to be eligible for IFC funding, a project must meet a number of IFC
criteria:
•
•
•
•
•
•
The project must be located in a developing country* that is a member of IFC.
It must be in the private sector.
It must be technically sound.
It must have good prospects of being profitable.
It must benefit the local economy.
It must be environmentally and socially sound, satisfying IFC environmental and
social standards as well as those of the host country.
Source: IFC Website
16
The Role of the IFC in the deal
•
The IFC is not only directly funding additional
polypropylene capacity, but creating an agent that
can drive further consolidation and investment in
the industry.
•
The IFC can also help promote an increased
transparency in corporate governance
•
For Suzano Petroquímica, having the IFC as a
partner in the project gives international seal of
quality.
Catalyst for improvement in the region
17
Case Outline
•
•
•
•
•
•
•
•
Overview of the Case
Learning Objective
Information about Brazil
Petrochemical Industry
International Finance Corporation (IFC)
Cost of Capital
Valuation
What Happened
18
Cost of Capital – The Country Risk Rating Model
•
We used the following data to calculate the Cost of Capital:
–
U.S risk free rate of 4.00% (10-year treasury on Jun-2005)
–
U.S risk-premium of 3.68% (average from 2000 to 2005)
–
U.S credit-rating of 92.45 (March 2005)
–
Brazil credit-rating of 46.7 (March 2005)
–
Industry BETA of 0.97 (Chemicals industry BETA in the US)
Based on the variables above, we reached a ICCRC of
19.76% and a Country Risk-Premium of 12.08%.
19
Cost of Capital – Project Adjustments
20
Case Outline
•
•
•
•
•
•
•
•
Overview of the Case
Learning Objective
Information about Brazil
Petrochemical Industry
International Finance Corporation (IFC)
Cost of Capital
Valuation
What Happened
21
Valuation
•
In order to find the fair value of Polibrasil, we
employed 3 methods of valuation:
– Discounted Cash Flow (DCF)
– Comparable transactions
– Comparable companies
•
A few important points with regard to the
valuation:
– Pro-forma estimates provided by Espirito Santo
(September 5th)
– We used an exchange rate of R$2.72 to the USD, (30 day
average prior to the transaction date of December 31,
2004)
22
Valuation – APV Method
Free Cash Flow
NOPLAT
Depreciation & Amortization
NWC Change
Capex
Fiscal Benefits
Free Cash Flow to Firm
2004 2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
159
93
202
201
161
162
184
206
227
262
286
298
87
74
78
80
75
70
66
62
59
57
55
53
(75)
(54)
(32)
7
16
(24)
(30)
(26)
(16)
(20)
(18)
(10)
(29)
(75) (133)
(31)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
0
7
10
11
12
4
4
0
0
0
0
0
142
Discount Factor
PV of FCF
Sum of PV of FCF
45
125
268
231
178
189
206
233
261
284
TV
301 2,992
0.87
0.76
0.66
0.57
0.50
0.43
0.37
0.33
0.28
0.25
0.21
0.21
39.1
94.4
175.9
131.8
88.3
81.5
77.2
75.9
73.8
69.8
64.3
639.4
1,611.5
Value of Debt
2004
Total Debt
Interest Payment
Interest Tax Shield (ITS)
PV of ITS
Sum of PV of ITS
2005E 2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E
476
480
475
486
498
513
521
528
535
542
550
(29)
(69)
(58)
(50)
(45)
(45)
(45)
(45)
(44)
(44)
(43)
9.9
23.5
19.7
17.0
15.3
15.3
15.3
15.3
15.0
15.0
14.6
8.6
17.7
12.9
9.7
116.1
23
7.6
6.6
5.7
5.0
4.2
3.7
3.1
TV
31.2
Valuation – Discounted Cash Flow
•
In conclusion, through our discounted cash flow
analysis the value of Polibrasil is of $243.7M.
Value of Operations
Value of Debt
Enterprise Value
2004 Debt
Equity Value
USD to BR
Equity Value in USD
50% Stake
24
1,611.5
116.1
1,727.6
402.0
1,325.6
2.72
487.3
243.7
Valuation - Comparable Transactions
International Comparable Transactions
Target
Date
Company
Mar-06 Millennium Chimical Inc
Jul-06 ChemFirst Inc
May-00 Geon C(BF Goodrich Co)
May-00 McWhorter Technologies Ince
Jan-00 BTP PLC
Aug-99 Union Carbide Corp
May-99 Celanese Canada Inc
Dec-98 Petrofina SA
Jun-98 ARCO Chemical Co
Jan-98 NOVA Corp of Alberta Ltd
Source: Investor Presentation, Jun/22/05
Country
EUA
EUA
EUA
EUA
England
EUA
Canada
Belgium
EUA
Canada
Acquirer
Company
Lyondell Chemical Co.
EI du Pont de Nemours and Co.
MA Hanna Co.
Eastman Chemical Co.
Clariant AG
Dow Chemical Co.
Hoeschst AG
Total SA
Lyondell Petrochemical
TransCanada Pipelines Ltd
Country
EUA
EUA
EUA
EUA
Switzerland
EUA
Germany
France
EUA
Canada
% Acquired
100%
100%
100%
100%
100%
100%
44%
99%
100%
100%
Transaction Size
$2,546
$429
$571
$353
$1,739
$11,692
$329
$12,768
$5,646
$4,906
EV/EBITDA
14.1x
10.0x
7.5x
7.9x
16.4x
13.5x
5.8x
6.9x
9.9x
9.0x
Comparable Transactions
Average
Median
High
Low
Multiple
10.1x
9.5x
16.4x
5.8x
Implied Valuation
3,312.8
3,099.6
5,379.2
1,902.4
EV in USD
1217.9
1139.6
1977.6
699.4
(1) Based on Exchange Rate of US$1 to R$2.72
(2) Assuming Net Debt of $152M USD, per Investor Presentation
25
(1)
Equity Value
1,065.9
987.6
1,825.6
547.4
(2)
50% Stake
533.0
493.8
912.8
273.7
Case Outline
•
•
•
•
•
•
•
•
Overview of the Case
Learning Objective
Information about Brazil
Petrochemical Industry
International Finance Corporation (IFC)
Cost of Capital
Valuation
What Happened
26
What Happened?
•
Jun/20/05 - Acquires remaining 50% stake of Polibrasil for
US$253M
–
–
–
•
Becomes largest polypropylene producer in Brasil
2nd largest thermoplastic resin producer
Project underway to expand PP capacity to 875 ktons
Sept/01/05 - Agreement with the International Finance Corporation
to fund acquisition, plus US$40M for expansion project
Financing by the IFC
Amount
Tranche A
39.5
Tranche B
110.5
Tranche C
10
Total
160
Maturity
12 years
8 years
12 years (bullet)
Rate
LIBOR + 2.625%
LIBOR + 1.875%
Variable
Source: Press release, September 01, 2005
•
Broader Financing package allows extension of debt maturity from
2.5 to 6 years
–
Better positioned for cyclical nature of the industry
27
The “New” Suzano Petroquímica
•
Dec/01/05 – Completes corporate restructuring that effectively
transforms company into a operating company
•
Engaging consolidation as one of the largest players in the sector
28
QUESTIONS?
29