Plenty of assets in infrastructure

The Lava-Jato (Car Wash) operation brought at once for sale to the market a variety of assets on the infrastructure sector. At least 5 billion of Reais in assets belonging to traditional companies of civil construction facing financial challenges are already available for interested parties. There is a bit of everything: from sanitary operations, highways, subways, airports to soccer arenas.

The big question is: will there be enough demand for this and at what cost? And more: who are the ones who will buy it? The bet is that the offer will be great for the next two to three years. The scenery is, at least, peculiar.

To complete the picture, in addition to private sales, the federal government also has a huge package of concessions to bid, on the logistics infrastructure area. The government calculations indicate that the financing may reach 198 billion of Reais. There are highways, ports, airports and railways planned to be auctioned until the end of the next year – no postponement or official change.

And, on top of that, Petrobras is looking for buyers for its ambitious plan of divestment. It plans to raise 15 billion of Dollars to its cash office until 2016. Therefore, the competition for capital promises to be fierce.

It is easy to conclude that the tide is in favor of the buyers – the side with a pocketful.

On the buyers side, the active one, are only those strategic foreign willing to bet on the Brazil of the future, mainly those from Asia, and equity funds dedicated to this segment, international and domestic.

There are household names like Brookfiled, Mitsui, in addition to many Chinese. Among the financers, the names are less well known. BTG Pactual, Gávea, Pátria, Blackstone, among many others, have dedicated funds and hefty balances from recent inflows to invest.

Traditional local investors, the constructors themselves, are out. Actually, they are the ones selling these operations.

The groups currently on financial hardship opted for selling properties, mostly concessions, precisely in order to maintain the segment of heavy construction, considering the focus.

On this list, there are companies like OAS, Galvão Engenharia and UTC. The first two are in process of judicial recovery and UTC is trying to negotiate with financial creditors.

Until now, Camargo Corrêa is the only one that will most likely leave the segment of construction and civil engineering. The group has several mature businesses in far less polemic segments, from cement to road concessions, and even manufactures of jeans and shoes. However, the company has not announced anything.

The two segment leaders – Andrade Gutierrez and Odebrecht – despite not showing any signs of financial weakness, are not investing either. Neither the atmosphere nor the disposition are favorable for large steps.

Andrade Gutierrez has been studying its assets in an attempt to better organize the operations, which are also diversified. Odebrecht, as far as we know of, does not have any ongoing strategic reviews. Nevertheless, the company has already claimed low interest on the federal auctions and the existence of assets that can be partially or completely sold worth to up 3 billion of Dollars.

What all these companies have in common is that their main leaderships, and reputation, are compromised by the Lava Jato investigations by the Brazilian Public Federal Ministry (MPF), since they are suspects for corruption, restraint of trade, bidding fraud, among others.

Besides the trust crises, Petrobras itself has contributed to the financial difficulty on the sector by failing to make relevant payments – mainly of agreements known as “additives”. This decision was a burden for middle-sized companies. Both UTC and Galvão Engenharia have, together, around 2.5 billion of Reais to be received for already finished, yet unpaid, constructions.

In comparison, the current prevision is that the sale of concessions equity by the constructors – since the volume is much smaller – seems much easier to become real. However, the matter is not that simple. Equity funds (private equity) and strategic groups believe that the supply of assets for sale will increase. That is why some of them are hesitating to decide what to do. Still they say not to feel any sensation of “selloff”.

Valor has consulted a number of local infrastructure funds, huge international funds and investment banks in search or already with “strategic” foreign partnerships.

In general, the message is: “at the right price, there is enough demand for everything”. According to the CEO of a major foreign bank, despite the current financial moment, there is long-term capital available for Brazil.

However, this “right” price, according to them, is far from the actual current one – which is casting doubts about the success and velocity of these operations. The most heard complaint is that the values are inconsistent with the sellers’ urgency and the return on investment.

The concessions on sale by the constructors are pieces of already in place consortiums. There is little to be made on these assets to widen the return on investment. Everything is already given. The buyer needs to: accept the service delivery conditions already agreed with the government; honor the construction contracts already ongoing; review or fit inside an existing shareholders’ agreement.

Not to mention that, according to those who already looked closely at some assets, since the buyers were the constructors themselves, they would accept a lower return of investment. The concession was just a way to assure demand in civil construction. In general, constructors are the concessions’ owners and work’s builders, contracted by themselves. Despite the seemingly conflict, there is no criticism about the quality of this execution, on the contrary: the negative point about the concession is that the profit already starts tight.

The business with 24.4% of participation from OAS on Invepar gives an idea on how tight it is. The asset is considered one of the most interesting, along with CAB, from Galvão Engenharia, and the 23% participant from UTC at the Viracopos airport. They are estimated to be the most expensive ones. Invepar is assessed on 1,2 billion of Reais, CAB in 800 million of Reais, and Viracopos in up to 500 million of Reais.

The operation realized by Brookfield, a loan to OAS in which Invepar’s stocks are the assurance, was taken to 43 potentially interested parties.

Brookfield, considered the obvious interested party on the country, has accepted to give 800 million to OAS in exchange to, in addition to the assurance and remuneration, the right to make the best offer to Invepar during the auction for the parent company’s judicial recovery.

The expectation is that all this movement may result in a major shift in the sector’s profile in the coming years, with more financial and foreign partnerships. Nevertheless, one factor is still unknown: who are going to be survivors from the Lava-Jato operation and which foreign companies are going to be considered major in Brazil.

Profitability in the infrastructure sector, as a whole, must be better partitioned between dealers (operators) and builders (executors).

There are, among the most daring, those who bet that the reorganization may lead to the decision from some contractors to accept business partners in order to survive. “I have few doubts that this will be course of action taken. Manly because of the credibility seal this can bring to a business with such worn out image”, stated the source interview by Valor.

Heavy construction companies, in general, are 100% controlled by founding groups. They are the origin point of large conglomerates. The segment where the organizations have grown into and expanded. Isolated from the current political matter, this is about a low financial risk business, because there is no equity commitment. The construction company gets early installments as the projects moves forwards.
The current urgent sales are, according to everyone, just the start of the sector’s reshaping in Brazil.