Braskem: Fade The M&A Optimism (NYSE:BAK)

Braskem’s (NYSE:BAK) inventory popped earlier this month following a fabric reality disclosure that its controlling shareholder Novonor (previously Odebrecht) had obtained a non-binding proposal from the state-owned Abu Dhabi Nationwide Oil Firm (Adnoc) to amass a 100% stake within the firm. It stays early days, although, and given Braskem’s historical past of on-again/off-again acquisition makes an attempt, I’d keep away from shopping for into the information pending extra concrete particulars. Given Novonor’s management (>50% of the voting capital of BAK), its reluctance to interact with Adnoc/Apollo, regardless of the large deal premium, makes a change of management consequence unlikely at this level. Additional complicating issues are strategic modifications at BAK’s different important shareholder, Petrobras (PBR), post-announcement of a brand new CEO, in addition to uncertainties round minority shareholders’ tag-along rights. So at this stage, it appears untimely to underwrite a transaction premium. As a substitute, buyers ought to give attention to the earnings outlook, which stays weak in opposition to a cyclical downswing and deteriorating coverage backdrop post-election.

A Braskem Sale is Again on the Desk

Earlier this month, Adnoc introduced a suggestion to controlling shareholder Novonor (~38% stake and >50% voting curiosity) to purchase a 100% stake in Braskem for as much as R$37.5bn. The headline R$47/share provide worth would suggest a 145% premium to the pre-announcement buying and selling worth of BRL19.2/share if confirmed. This is not the primary time a international strategic participant has made an acquisition try – recall that in 2018, LyondellBasell (LYB) additionally launched an unsuccessful bid for Braskem (at a sizeable premium to in the present day’s market cap).

Per Novonor, the BRL47/share deal worth is cut up throughout a number of tranches – a BRL20/share upfront money cost, adopted by BRL20/share and BRL7/share in 4% yielding perpetual debentures and warrants, respectively. To date, Petrobras and Novonor (mixed >80% management) have refused to interact, citing that greater than half of the provide is within the type of deferred cost constructions, and thus, the online current worth might meaningfully deviate from the BRL47/share headline provide. Consequently, the inventory has moved additional under the BRL47/share provide worth, although at BRL23/share, Braskem nonetheless trades at a >20% premium to pre-announcement ranges.

The Case for Strategic Worth Stays Legitimate, however Deal Hurdles are Vital

Braskem’s strategic worth has by no means been doubtful. The corporate stays the dominant participant in Brazil, with >90% of the prevailing ethylene capability. Maybe extra apparently, Braskem additionally has a agency foothold within the world ‘inexperienced ethylene’ growth (addressable market of $10bn by 2025 and $15bn by 2030), supported by its favorable value construction and entry to bioethanol. In an rising market with an intensive chemical demand development runway and the place aggressive dynamics have been comparatively benign (restricted new ethylene capability additions during the last many years), Braskem additionally has compelling core earnings visibility. Outdoors of Brazil, the corporate maintains a robust presence, with a portfolio of worldwide belongings spanning Mexico (Idesa fuel cracker) and the US and Europe (polypropylene), all of which have sustained sturdy capability utilization by way of the cycles. Thus, Braskem’s belongings and know-how provide a comparatively cheap approach for main international strategic gamers to develop in chemical compounds and entry new markets.

But, Braskem’s market valuation has all the time been on the decrease finish of its friends – for an excellent motive. As LyondellBasell present in its 2018/2019 acquisition try, the roadblocks are important. For one, the provide worth has to clear not simply Novonor and Petrobras but in addition the banks, since controlling shareholder Novonor’s Braskem stake is pledged as collateral to collectors and can’t be bought with out their approval. Additionally regarding is the Alagoas overhang (a results of environmental injury brought on by Braskem’s mining facility within the area), which has pushed a gentle improve in liabilities lately. As of Q1 2023, the provisions on the steadiness sheet amounted to BRL6bn, although there could possibly be extra escalations on the horizon, significantly with a latest ruling by the Alagoas State court docket blocking >BRL1.1bn of Braskem money (equal to a high-single-digit proportion of the corporate’s market cap). Few potential patrons could be comfy taking up these liabilities.

Minority shareholders must be significantly cautious. Whereas the newest rumors round a competing Petrobras provide (by way of an choice to train its preemptive acquisition proper) seemingly enhance the chance/reward of a merger arbitrage commerce, it is not clear if minority shareholders could have tag-along rights. Even within the Adnoc acquisition situation, Novonor’s voting management (and financial management, along with Petrobras) means minorities have little say within the course of. The Lula administration hasn’t been market-friendly both, so a sub-optimal consequence for shareholders is an actual chance.

Fade the M&A Optimism

Adnoc’s non-binding proposal for a 100% stake in Braskem (delivered to controlling shareholder Novonor) has put the inventory in play. The one certainty, for now, is extra volatility, nevertheless, given Braskem’s historical past of on-again/off-again buyout performs lately. The market appears skeptical as properly, with the inventory worth nonetheless properly under the as much as BRL47/share provide worth and retreating additional following Novonor’s reluctance to interact with Adnoc/Apollo. The uncertainties round key shareholder Petrobras’ technique post-election and the appointment of a brand new CEO additional weigh on a change of management consequence. The implications of a deal for minorities are additionally unsure, significantly round their tag-along rights in several transaction situations. With the inventory nonetheless properly above pre-announcement ranges, the valuation seemingly nonetheless embeds some deal premium following the disclosure, which exposes buyers to the draw back ought to the market re-focus on Braskem’s deteriorating fundamentals.