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Case Study

Equity capital raising: The SEO of Petrobras 2010 (B)

By Nuno Fernandes and Lars-Fredrik Forberg

16 pages

June 2014

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Reference: IMD-7-1582

This two-part case series is about the largest equity-raising deal in history – the Petrobras seasoned equity offering (SEO) of 2010. In June 2010, Petrobras, Brazil’s national oil company was preparing a share issue to develop its “pre-salt” oil fields – so called because they are trapped under several kilometers of seawater, rock and a hard-to-penetrate layer of salt. The hydrocarbons resting in the pre-salt fields could make Brazil one of the world’s largest oil-exporting nations. Brazil’s offshore pre-salt area – widely tipped to rival the North Sea in terms of size and importance – had been generating excitement in the energy world since its discovery in 2005. Six new pre-salt fields had been discovered more recently and were now ready for exploration. The investments outlined in the plan were huge and would transform Petrobras into one of the world’s largest producers. However, this also posed significant financing challenges for Petrobras, given its capacity to generate cash from its current operations. So, how could it raise the money? A bond issue so soon after the previous one was a possibility. It would then be among the world’s biggest bond issues. But there was a risk of not meeting the need for capital. How would such an issue affect its debt-to-value ratio and its rating? Would Petrobras be able to maintain its investment grade status? A share issue was another possibility, but it would also be very big. Would the market be ready for such a big issue so soon after the financial crisis? Many unresolved issues lay ahead. Both Gabrielli (CEO) and Barbassa (CFO) understood that regardless of the method used, they were facing one of the world’s biggest funding challenges to date. A lot was at stake and wrong choices would have disastrous consequences for both Petrobras and Brazil.

Learning Objective

This integrative case highlights many strategic, financial and governance issues related to equity markets, including seasoned equity offerings across multiple exchanges. Participants have the opportunity to analyze the strategic, organizational and financial issues associated with the world’s largest equity deal ever and to develop valuation skills with a focus on emerging markets or, more generally, cross-border valuations. Key learnings include financial strategies and capital sturcture; financing large investment plans in emerging markets; SEOs; voting and non-voting shares, and governance implications; emerging markets and political risk; Oil and gas topics such as technological change and greater size of projects.

Keywords

Financial Strategy, Capital Structure, Investment Planning, Emerging Market, Governance, Risk

Settings

South America, Brazil
Petrobras, Materials, Oil and Gas
2010

Type

Published Sources

Available Languages

English

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This case study is part of a series

Equity capital raising: The SEO of Petrobras 2010 (A)
Equity capital raising: The SEO of Petrobras 2010 (B)

This case study is part of a series

Equity capital raising: The SEO of Petrobras 2010 (A)
Equity capital raising: The SEO of Petrobras 2010 (B)

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