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  • 1. Suzano Petroquímica and the Acquisition of Polibrasil Prepared by: Daniel Sensel, Ernesto Knizek, David Nuñez, Alvaro Pipino, Emilio Baltodano Presented on: February 28, 2006
  • 2. Case Outline
    • Overview of the Case
    • Learning Objective
    • Information about Brazil
    • Petrochemical Industry
    • International Finance Corporation (IFC)
    • Cost of Capital
    • Valuation
    • What Happened
  • 3. 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
  • 4. 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?
  • 5. Case Outline
    • Overview of the Case
    • Learning Objective
    • Information about Brazil
    • Petrochemical Industry
    • International Finance Corporation (IFC)
    • Cost of Capital
    • Valuation
    • What Happened
  • 6. Brazil - A Brief History
    • 11 th 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
  • 7. Latin America – Not for the faint of heart
  • 8. Case Outline
    • Overview of the Case
    • Learning Objective
    • Information about Brazil
    • Petrochemical Industry
    • International Finance Corporation (IFC)
    • Cost of Capital
    • Valuation
    • What Happened
  • 9. Brazilian Petrochemical Industry 1 st Generation 2 nd Generation 3 rd Generation Polibrasil
  • 10. 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
  • 11. Suzano Petroquímica – Holding Company
    • Opportunity to simplify the organizational structure
    • Bring company closer to capital markets
  • 12. 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
  • 13. Demand vs. Capacity A lot of opportunity, but significant investment required
  • 14. Case Outline
    • Overview of the Case
    • Learning Objective
    • Information about Brazil
    • Petrochemical Industry
    • International Finance Corporation (IFC)
    • Cost of Capital
    • Valuation
    • What Happened
  • 15. 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.”
  • 16. 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
  • 17. 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
  • 18. Case Outline
    • Overview of the Case
    • Learning Objective
    • Information about Brazil
    • Petrochemical Industry
    • International Finance Corporation (IFC)
    • Cost of Capital
    • Valuation
    • What Happened
  • 19. 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%.
  • 20. Cost of Capital – Project Adjustments
  • 21. Case Outline
    • Overview of the Case
    • Learning Objective
    • Information about Brazil
    • Petrochemical Industry
    • International Finance Corporation (IFC)
    • Cost of Capital
    • Valuation
    • What Happened
  • 22. 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 5 th )
      • We used an exchange rate of R$2.72 to the USD, (30 day average prior to the transaction date of December 31, 2004)
  • 23. Valuation – APV Method
  • 24. Valuation – Discounted Cash Flow
    • In conclusion, through our discounted cash flow analysis the value of Polibrasil is of $243.7M.
  • 25. Valuation - Comparable Transactions
  • 26. Case Outline
    • Overview of the Case
    • Learning Objective
    • Information about Brazil
    • Petrochemical Industry
    • International Finance Corporation (IFC)
    • Cost of Capital
    • Valuation
    • What Happened
  • 27. What Happened?
    • Jun/20/05 - Acquires remaining 50% stake of Polibrasil for US$253M
      • Becomes largest polypropylene producer in Brasil
      • 2 nd 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
    • Broader Financing package allows extension of debt maturity from 2.5 to 6 years
      • Better positioned for cyclical nature of the industry
  • 28. 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
  • 29. QUESTIONS?