Topics: Petroleum, Balance sheet, Asset Pages: 47 (9612 words) Published: March 18, 2012
REV: MARCH 10, 2004


Drilling South: Petrobras Evaluates Pecom
If you live in our neighborhood, you've got to look at Argentina. It's going through a major crisis today, but it is the second largest market in South America.1 — Francisco Gros, CEO, Petrobras

João Nogueira Batista, Chief Financial Officer of the Brazilian firm Petrobras, reflected on Gros’s words as he prepared for a Board of Directors meeting in July 2002. The main item on the Board’s agenda was the proposed acquisition of an Argentinean firm, the Perez Companc Group, or Pecom.2 The acquisition would significantly increase Petrobras’s oil and gas production and add to its oil reserves. It would also provide the mainly Brazilian-based Petrobras with considerable foreign interests. Petrobras would have access to Pecom’s management team, which had worked in most of the major Latin American countries and under different operating environments, enhancing Petrobras’s ability to manage an international portfolio. Recent corporate governance changes meant that Petrobras now had more independence from the Brazilian government, and some managers were eager to explore new opportunities for the company, including the possible acquisition of Pecom. Others were more cautious. General elections would be held in a few months, and one of the leading candidates for president, Luiz Inácio Lula da Silva of the Workers’ Party, did not fully support Petrobras’s increasing autonomy. If Lula won the election, Petrobras’s new structure and its strategy could be challenged. At the same time, the acquisition of Pecom would give Petrobras’s even more weight and could increase the company’s already substantial contribution to the Brazilian economy. Batista had spent the previous weeks debating the merits of the acquisition and how to value Pecom with his team. There had been numerous discussions on the cost of capital for the acquisition, and especially on how to incorporate country risk given the current economic upheaval in Argentina. Uncertainty over the appropriate discount rate to use in a cash flow model led some team members 1 Andrew Kelly, “New Petrobras chief focused on returns and ratings,” Reuters News, March 26, 2002, available from Factiva, . 2 The company was constituted as a holding company under the legal name of PC Holding S.A. Since its main asset was

Pecom, an energy company, the name Pecom stands for Perez Companc, unless noted otherwise,. ________________________________________________________________________________________________________________ Professor Mihir Desai and Ricardo Reisen de Pinho, Senior Researcher at the Harvard Business School Latin America Research Center, prepared this case with the collaboration of Gustavo Herrero, Executive Director fo the HBS LARC and the assistance of Research Associate Kathleen Luchs. This case was developed from published sources. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2003 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.


Drilling South: Petrobras Evaluates Pecom

to advocate other approaches to the valuation, such as multiples. It was Batista’s responsibility to present these different perspectives to the Board. The uncertainties inherent in valuing Pecom were bound to give rise to interesting discussions at the forthcoming Board meeting.

Petrobras was created as a...
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