Eike Batista: Reversal of fortune

The empire of Brazil’s former richest man is imploding

The farmland around São João da Barra is characterised by low-lying restinga scrubland interspersed with pineapple and sugar cane plantations.

But any impression of rustic tranquillity in this remote corner of Rio de Janeiro state is an illusion, according to Asprim, a local landowners’ association.

São João da Barra has become the scene of a David-and-Goliath battle between the region’s small farmers and Eike Batista, the tycoon who was formerly Brazil’s richest man but whose empire of oil, mining and logistics start-up companies is imploding.

Mr Batista’s effort to build the Açu Superport here, a $40bn complex one and a half times the size of Manhattan Island, has led to the mass expropriation of land from the surrounding families, a process Asprim alleges is being done through coercion.

“The police treated me like I was a dangerous beast, like you might handle a wildcat, they dragged my hands behind my back and handcuffed me,” says farmer Luiz Manoel Peixoto, showing the scars on his wrists. He alleges officers took him in a chokehold and threw him in jail after he tried to stop officials bulldozing his land two months ago.

The police deny any knowledge of the incident, and Mr Batista’s logistics company LLX and the Rio government’s industrial agency Codin, which is conducting the expropriations, reject allegations of forced resettlement.

But what is clear is that an ugly brawl with small farmers, who are now seeking to bring criminal action against him, is the last thing Mr Batista needs. OGX, his flagship oil company, is teetering on the brink of bankruptcy after declaring in July that its only producing wells were flops and were likely to be shut down.

This has brought the tycoon – who embodied better than any other the euphoria about Brazil and the other so-called Brics nations during the first decade of the 21st century – to the brink of ruin. His wealth, estimated only last year at more than $30bn, has shrunk to a net $200m, according to the Bloomberg Billionaires Index.

The fall of the fast-living former Amazon gold prospector and powerboat champion who married a Playboy cover girl is certainly a test for his army of foreign partners and investors. These range from General Electric to the Ontario Teachers’ Pension Plan. His creditors include US-based fund manager Pimco and a range of Brazilian banks.

But his demise is also a broader sign of the tougher times ahead for Brazilian business now that excitement over commodities is waning. The era of easy liquidity is over and Brazilian companies will have to fight rivals in other emerging markets for increasingly scarce capital.

“We had a booming economy, China was growing, commodity prices were increasing,” says Sergio Lazzarini of the Insper Institute of Education and Research in São Paulo. “It will be much more difficult to create this sort of optimism in the future.”

Mr Batista’s mother, Jutta Fuhrken, was born in Germany and he studied there in the 1970s. His father, Eliezer Batista da Silva, was Brazil’s minister of mines and energy and later president of Vale, the world’s largest iron ore exporter.

Mr Batista got into the gold mining business while still a young man. In 1991 he married model Luma de Oliveira. They had two children, Thor, his heir apparent, and Olin.

When his gold mining company ran into financial trouble in Greece, also amid protests by locals, Mr Batista turned the focus of his EBX group, whose “X” is meant to signify multiple returns, back on Brazil.

In 2006 he founded OGX, the supposed group cash cow. The plan was that OGX would contract vessels from his start-up oil services company, OSX, which would be based at LLX’s Açu port. MPX, his energy company, would provide power, and MMX, his miner, conduct other business.

His timing was impeccable. In 2007 Brazil announced its discovery of giant offshore oilfields, the biggest find in the Americas in decades. Mr Batista set about repackaging for a new generation of investors the familiar Brazilian story of a land of endless but as yet unrealised promise, especially in natural resources.

“With a platform of a country which is virgin, unexplored ... I am honestly happy to be a Brazilian living this cycle,” he gushed at an investor meeting in March last year organised by US conglomerate GE, which owns a 0.8 per cent stake in his private holding company, Centennial Asset Brazilian Equity.

Aiding his sales pitch were record low interest rates in the developed world that drove investors abroad to seek yield. The Brazilian government, meanwhile, did its part by radically expanding lending to large companies through development bank BNDES.

Investors bought the story. OGX’s market capitalisation soared from $22bn at listing to $35bn at the time of the GE investor meeting. Comparing OGX and its 350 employees with Facebook, which has about 3,000 staff, he boasted to the gathering: “My market cap per capita [employee] is three times bigger than Facebook.”

He attributed his success to OGX’s skill at exploration, with a 91 per cent strike rate at its wells. He outlined a remarkably ambitious production forecast of 1.4m barrels a day by 2020, or more than half of Brazil’s current national production with earnings before interest, taxation, depreciation and amortisation to reach $5bn by next year. (As of May this year, production was below 10,000b/d and ebitda was negative).

“You can see here these are 80 per cent ebitda margin businesses,” he told the meeting. “I specialise myself in finding white truffles, I don’t like marginal stuff.”

. . .

Beneath the hype, however, was a different story. The prospectus for OGX’s listing in 2008 mentions 10 times that it is well positioned to “capture Brazil’s vast untapped potential prospective oil and natural gas resources currently estimated by industry experts between approximately 70-100bn barrels of oil equivalent”.

But the prospectus also warns, albeit with less gusto, that wells previously drilled near some of OGX’s main prospects in the Campos Basin “were not deemed commercially viable at the time”. It hastens to reassure the investor that current oil prices and new production techniques had turned them into “relatively lower risk opportunities”. The prospectus also talks repeatedly about the supposed track record of the management and exploration team, even though in spite of the experience of some individuals, OGX was only two years old at the time and had been involved in oil for just one year.

In the event, the fields were duds. The technology to extract the oil was not available. In its statement of early July, after months of missed production forecasts, OGX finally admitted “there does not exist at the moment, the technological capacity” to make the fields economically viable.

The shares of OGX and its sister companies collapsed. With no oil, Mr Batista’s parent company, EBX, appeared to be bankrupt, UBS said in a report. “Most Brazilian banks are exposed,” it said. Worst hit is BNDES with about R$10.4bn ($4.5bn) lent or committed to the group, while state bank Caixa Econômica and private banks Bradesco and Itaú are owed more than R$1bn each and smaller investment bank, BTG, is owed R$649m, according to Bank of America Merrill Lynch estimates.

Mr Batista was forced to begin restructuring. He sold control of electricity producer MPX and began winding down shipbuilder OSX while looking for investors for miner MMX and the Açu port. He also converted a $2bn investment by Abu Dhabi-based group Mubadala into debt. Proceeds of the sales are expected to go to his banks. Bondholders who lent nearly $4bn to OGX are expected to be left empty-handed when it finally runs out of cash, which could be any day soon.

Ildo Sauer, a professor at the University of São Paulo and a former Petrobras official, questioned why CVM, Brazil’s market watchdog, and oil regulator ANP, stood by. “He found the oil, he didn’t know how to produce it, yet he still used it as a marketing platform, so I ask, where was the government?”

CVM responds that it is investigating OGX, while ANP says it rigorously monitors the activities of all oil companies including OGX.

Investor reactions, meanwhile, have ranged from dogged optimism to rage.

“I still believe in the long-term prospects of the company,” says Willian Magalhães, an individual investor who has bought 21,000 shares in the oil company since January.

Others are furious over an as yet unfulfilled promise by Mr Batista to grant a $1bn lifeline to OGX via a put option, as well as his sale of shares two weeks before the announcement that his wells were defunct. Three independent directors who would have ruled on the put option resigned without explanation in June.

“Was it a coincidence?” Aurélio Valporto, one of a group of 60 minority investors who are planning legal action against Mr Batista and OGX’s independent directors, asks of the share sale. “For us, it’s evident this is the most scandalous insider trading case in the history of the Brazilian stock market,” he says. OGX and Mr Batista have declined to comment on the allegations.

. . .

Mr Batista has all but disappeared from public view. His once busy Twitter account fell silent in May. In late July he briefly reappeared, publishing an impassioned letter in Valor Economico newspaper defending his record.

He said the person who lost most was “one shareholder: Eike Batista”. “It is unfair and unacceptable, on the other hand, to hear that I deliberately misled someone to believe in a dream or a fantasy,” he wrote. “The person who most believed in OGX was me. I continue to believe and because of this, over the past few months we have been reinventing the company. I won’t give up on this challenge.”

One group who never believed is the landowners’ association at São João da Barra. Despite Mr Batista’s troubles, the expropriations are continuing even though thousands of acres of land taken sit idle. Meanwhile, sand dredged to create the port is creating salinity problems, federal prosecutors allege.

The Rio state government says those complaining are troublemakers – the majority of people, or 271 families, have already handed over land in return for compensation, and 16 households so far have been resettled.

But Noêmia Magalhães, a leader of Asprim, whose small parcel of land is surrounded by expropriated lots, says she will not leave, even though a fresh court order has arrived demanding her exit. “If they destroy my house, I won’t have anywhere to go,” she says, closing the door to keep out stray cats from the destroyed houses of neighbours. “If it was for the good of many people, I might consider it. But it’s not, it’s only for the benefit of one man.”

The tycoons who capture Brazil’s imagination

His vision was to build an infrastructure network of a size Latin America had never seen before.

He courted the media and investors with his fevered sales pitches, attracting millions of dollars for his projects, even expanding into hotels before he finally crumbled under the weight of his debts.

Eike Batista? No, Percival Farquhar, the great railway tycoon of the turn of the 20th century who envisioned building a rail network across Latin America but ended up being better at raising finances than execution.

Latin America’s size and natural resources mean that characters such as Mr Farquhar and Mr Batista, talented salesmen with supersized plans, will continue to reappear, says Aldo Musacchio, an associate professor at Harvard Business School.

“My sense from studying Brazilian history is that in every big cycle there are some entrepreneurs who sell a big dream. They overshoot and then they fail because they take on too much debt,” he says.

Like Mr Farquhar, Mr Batista had his admirers and detractors. An official with General Electric described him as “one of the world’s greatest entrepreneurs”.

Others attribute his rapid rise to his close government links. These range from his father’s influential positions in government and Vale, the mining company, to his poaching of a group of oil exploration executives from Petrobras, the state-owned oil company, in 2007. Later that year, the state auctioned exploration blocks.

“The government participated in an act that was against the national interest to have held the auction,” says Ildo Sauer, a professor at the University of São Paulo, and a former director of energy and gas at Petrobras.

He says Mr Batista tirelessly courted politicians. President Dilma Rousseff appeared publicly with Mr Batista in a company jacket during a visit to his port complex, in which the Rio state government is also a big partner.

Mr Batista’s EBX Group declined to comment on Prof Sauer’s claims. But he has rejected the idea in the past of government support.

Mr Batista’s biggest problem was an inappropriate capital structure, with large amounts of short-term debt leveraged against resources that were still in the ground.

While analysts believe most large Brazilian groups are well managed, Prof Musacchio warned that with liquidity tightening, companies will need to be prepared for deleveraging.

“In Brazil when the well runs dry, it runs really dry. Right now my concern is that some of the firms that really overextended and took on too much debt are in trouble,” he says.

With additional reporting by Thalita Carrico

Copyright The Financial Times Limited 2017. All rights reserved. You may share using our article tools. Please don't cut articles from FT.com and redistribute by email or post to the web.