Investors woke up on Tuesday to see the shares of petrochemical company Braskem melting nearly 20 percent after merger talks with LyondellBasell collapsed. But why exactly did the Dutch company give up on an acquisition that would transform it into the global leader of thermoplastic resin? The answer lies in the financial woes of Braskem’s controllers, a disaster in the state of Alagoas and trouble with American securities authorities.

</span></p> <p><span style="font-weight: 400;">It has been almost a year since exclusive negotiations started. At that time, Braskem shares listed on the São Paulo stock exchange (BRKM5) had their best performance ever in a single trading session, rising 21.4 percent. The deal, at first, meant a win-win situation for both Lyondell and Braskem’s controllers: Brazilian construction group Odebrecht and the state-owned oil giant Petrobras. </span></p> <p><span style="font-weight: 400;">Petrobras and Odebrecht were desperately trying to reduce their debts. After being involved in Operation Car Wash scandals and slapped with hefty fines, both companies came up with debt restructuring plans, aiming to get rid of non-essential assets—such as their petrochemical operations. Although Odebrecht is the controlling company—with 50.1 percent of owner&#8217;s equity—any offer provided by LyondellBasell could be extended to Petrobras, under contractual clauses.</span></p> <p><span style="font-weight: 400;">Among the two giants, Odebrecht’s situation caused the most concern. Financial issues have been going on for years and in 2016, in an attempt to gain some breathing room, the company offered its stake in Braskem </span><a href="https://www.valor.com.br/empresas/6290639/por-que-venda-da-braskem-para-lyondellbasell-empacou"><span style="font-weight: 400;">as collateral for loans</span></a><span style="font-weight: 400;"> with banks Itaú Unibanco, Bradesco, Santander Brasil, Banco do Brasil, and the BNDES. The media speculates that selling Braskem could have given a </span><a href="https://www.seudinheiro.com/azedou-lyondellbasell-desiste-de-compra-da-braskem-e-acoes-da-empresa-desabam/"><span style="font-weight: 400;">BRL 20 billion boost for Odebrecht</span></a><span style="font-weight: 400;">. </span></p> <p><span style="font-weight: 400;">The problem is that, since then, debts have soared to BRL 80 billion, including payments to the government and operational issues. According to newspaper </span><i><span style="font-weight: 400;">Valor</span></i><span style="font-weight: 400;">, the financial situation of Odebrecht has been one of the roadblocks that made LyondellBasell suspend talks with the Brazilian company. </span></p> <p><span style="font-weight: 400;">As noted by </span><i><span style="font-weight: 400;">Broadcast</span></i><span style="font-weight: 400;">, a news agency owned by newspaper </span><i><span style="font-weight: 400;">Estado de S.Paulo</span></i><span style="font-weight: 400;">, the Odebrecht group is </span><a href="https://economia.estadao.com.br/blogs/coluna-do-broad/caixa-pode-levar-odebrecht-a-recuperacao-judicial/"><span style="font-weight: 400;">close to filling a request for court-supervised reorganization</span></a><span style="font-weight: 400;">. This move results from the decision of banks Caixa and Banco Votorantim—which did not receive Braskem shares as collateral for Odebrecht’s loans—to call in their debts. </span></p> <p><span style="font-weight: 400;">Their patience seems to have run out after Atvos, the group’s subsidiary for sugar and ethanol operations, asked for the court’s protection—as we highlighted in our </span><a href="https://brazilian.report/newsletters/daily-briefing/2019/06/04/june-4-2019-mad-cow-brazil-beef/"><span style="font-weight: 400;">June 4 newsletter</span></a><span style="font-weight: 400;">. Atvos’ debt also has Braskem shares as collateral. Currently, the petrochemical company is the only profitable part of the Odebrecht group—which once included the </span><a href="https://www.enr.com/toplists/2016-Top-250-International-Contractors1"><span style="font-weight: 400;">sixth largest contractor in the world</span></a><span style="font-weight: 400;">.</span></p> <p><a href="https://www.nordresearch.com.br/artigos/nord-insights/lyondell-retira-oferta-por-braskem/?utm_source=twitter&amp;utm_medium=perfilnord&amp;utm_campaign=nrd-mel-tw-nord-20190604-x-op-x-nt1"><span style="font-weight: 400;">On a blog post</span></a><span style="font-weight: 400;">, Bruce Barbosa, stocks analyst at Nord Research, warned about the possibility of a cross-default, which happens when creditors may file for bankruptcy on behalf of other companies from the same group when requested. “And this protection to creditors may be quite bitter for Odebrecht,” he explained. </span></p> <p><span style="font-weight: 400;">Sources told </span><i><span style="font-weight: 400;">Valor</span></i><span style="font-weight: 400;"> that LyondellBasell “doesn’t rule out negotiations of a potential acquisition of Braskem amid the potential court-supervised reorganization of Odebrecht.”</span></p> <hr /> <p>oooo</p> <hr /> <h2>Braskem has its own homework</h2> <p><span style="font-weight: 400;">Besides Odebrecht’s mess, Braskem has to deal with its own problems. Authorities believe the company&#8217;s halite mines are </span><a href="http://agenciabrasil.ebc.com.br/geral/noticia/2019-05/agencia-interdita-pocos-de-sal-gema-da-braskem-em-alagoas"><span style="font-weight: 400;">the cause of cracks</span></a><span style="font-weight: 400;"> in buildings and streets of three neighborhoods in Maceió, the capital of Alagoas state. </span></p> <p><span style="font-weight: 400;">That led Brazil’s National Mining Agency to close Braskem’s halite mines in the city, affecting the production of PVC and caustic soda. The company was also fined BRL 29.3 million. Courts have frozen BRL 100 million in assets and </span><a href="https://www.infomoney.com.br/onde-investir/fundos-de-investimento/noticia/8371959/apos-queda-alaska-compra-mais-acoes-da-braskem-e-quantitas-ganha-100-do-cdi-so-hoje"><span style="font-weight: 400;">BRL 2.7 billion in dividends for shareholders</span></a><span style="font-weight: 400;">—a hefty amount, but still smaller than the BRL 6.7 billion demanded by state prosecutors. The press have reported that a lack of visibility about the extension of the damage—and financial compensations—is another roadblock for the LyondellBasell deal. </span></p> <p><span style="font-weight: 400;">Also, Braskem did not provide 20-F report related to 2017 to the U.S. Securities and Exchange Commission (SEC), causing the </span><a href="https://g1.globo.com/economia/noticia/2019/05/13/papeis-da-braskem-devem-sair-da-bolsa-de-ny-por-atraso-em-entrega-de-formulario.ghtml"><span style="font-weight: 400;">suspension of its shares listed in New York</span></a><span style="font-weight: 400;">—and they may be delisted if the company doesn’t deliver the necessary information. </span></p> <p><span style="font-weight: 400;">Regarding that matter, the company had already approved changes to its board, required by auditing company PwC as a condition for signing the 20-F report.

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.