Suzano Petroqu

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Suzano Petroquímica and the Acquisition of
Polibrasil

• Prepared by Daniel Sensel, Ernesto Knizek,
  David Nuñez, Alvaro Pipino, Emilio Baltodano
• Presented on February 28, 2006

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Case Outline

• Overview of the Case
• Learning Objective
• Information about Brazil
• Petrochemical Industry
• International Finance Corporation (IFC)
• Cost of Capital
• Valuation
• What Happened

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Overview of the Case

• Suzano Petroquímica
• One of Brazils 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 R1,610M in 2004 ( US600M)
• 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

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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?

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Case Outline

• Overview of the Case
• Learning Objective
• Information about Brazil
• Petrochemical Industry
• International Finance Corporation (IFC)
• Cost of Capital
• Valuation
• What Happened

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Brazil - A Brief History

• 11th largest economy in the world as of 2004
• GPD of US785B 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

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Latin America Not for the faint of heart
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Case Outline

• Overview of the Case
• Learning Objective
• Information about Brazil
• Petrochemical Industry
• International Finance Corporation (IFC)
• Cost of Capital
• Valuation
• What Happened

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Brazilian Petrochemical Industry
1st Generation
2nd Generation
3rd Generation
Polibrasil
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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
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Suzano Petroquímica Holding Company

• Opportunity to simplify the organizational
  structure
• Bring company closer to capital markets

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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 gt4 CAGR
• Low penetration rates

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Demand vs. Capacity
A lot of opportunity, but significant investment
required
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Case Outline

• Overview of the Case
• Learning Objective
• Information about Brazil
• Petrochemical Industry
• International Finance Corporation (IFC)
• Cost of Capital
• Valuation
• What Happened

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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.

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International Finance Corporation (IFC)

• IFC is a member of the World Bank Group
• IFCs mission is to promote sustainable private
  sector investment in developing countries,
  helping to reduce poverty and improve peoples
  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

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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
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Case Outline

• Overview of the Case
• Learning Objective
• Information about Brazil
• Petrochemical Industry
• International Finance Corporation (IFC)
• Cost of Capital
• Valuation
• What Happened

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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.

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Cost of Capital Project Adjustments
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Case Outline

• Overview of the Case
• Learning Objective
• Information about Brazil
• Petrochemical Industry
• International Finance Corporation (IFC)
• Cost of Capital
• Valuation
• What Happened

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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 R2.72 to the USD,
  (30 day average prior to the transaction date of
  December 31, 2004)

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Valuation APV Method
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Valuation Discounted Cash Flow

• In conclusion, through our discounted cash flow
  analysis the value of Polibrasil is of 243.7M.

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Valuation - Comparable Transactions
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Case Outline

• Overview of the Case
• Learning Objective
• Information about Brazil
• Petrochemical Industry
• International Finance Corporation (IFC)
• Cost of Capital
• Valuation
• What Happened

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What Happened?

• Jun/20/05 - Acquires remaining 50 stake of
  Polibrasil for US253M
• 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
  US40M 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

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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

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QUESTIONS?