RIO DE JANEIRO The shares of companies controlled by Brazilian billionaire Eike Batista's Grupo EBX soared on Thursday after high-flying investment bank BTG Pactual Group tossed the group a financial and management lifeline.
An agreement between Batista, 56, and fellow billionaire Andre Esteves, 43, the Brazilian financial wunderkind who controls BTG Pactual, helped lift the market value of EBX companies by about 2.6 billion reais ($1.33 billion) in late afternoon trading, according to Thomson Reuters calculations.
Under the accord, BTG Pactual will provide EBX with access to credit and management services. However, Batista enters the deal with waning fortunes while Esteves' power is growing. Only two years ago, Batista declared that his goal was to become the world's richest man.
News of the pact halted a year of declines in the shares of EBX companies that sliced nearly $20 billion off Batista's wealth and cost him the title of Brazil's richest man. But doubts remain over whether the deal will quickly ease the oil, energy, mining port and shipbuilding group's problems.
"This makes sense. Things haven't moved as quickly as planned and money is running out," said Pedro Galdi, an oil and mining analyst with SLW Corretora, a São Paulo brokerage. "Batista's companies need lots of money and a credit partner, and Esteves is as sharp as a fox."
Some of the share rise is being attributed to a "short squeeze" on investors who bet in recent weeks on further declines, according to investors and analysts, including Oswaldo Telles, an oil and gas analyst with Espirito Santo Investment bank in Sao Paulo.
The shares of OGX Petroleo e Gas Participacoes SA (OGXP3.SA), Brazil's second-largest oil company by market value, rose 16.4 percent to close at 3.40 reais in Sao Paulo on Thursday. Earlier it rose as much as 28 percent. Iron ore miner MMX Mineracao e Metalicos SA (MMXM3.SA) gained 17.04 percent to 3.64 reais after rising as much as 20 percent.
Port and real estate group LLX Logistica SA LLXL3.SA rose 10.4 percent to 2.44 reais. Shipbuilding and ship-leasing company OSX Brasil SA (OSXB3.SA) climbed 10.2 percent to 7.36 reais. Natural gas and electricity company MPX Energia SA MPXE3.SA rose 1.5 percent to 11.22 reais.
CCX Carvao da Colombia SA (CCXC3.SA) was little changed falling 0.25 percent to 4.02 reais. Batista has offered to buy all outstanding shares in the company.
A short squeeze happens when investors, known as short sellers, lose a bet that shares will fall. Instead of selling borrowed stock and profiting by buying it back more cheaply, shares rise, forcing them buy stock in a scramble to cut losses and driving prices higher still.
"The BTG Pactual deal has put a floor under the stock," Telles said. "I don't believe this is so much a fundamental move as a short squeeze. To rise more, we will have to wait and see if Esteves can really help EBX group operations, but the down side is largely gone."
Despite its gains, OGX is still down more than 80 percent from its all-time-high of about 23.03 reais in October 2010. MMX and LLX are down nearly 80 percent from all-time highs in 2008 and 2010, respectively.
"This is simply a partnership aimed at increasing the flow of funding for a group that was running short of financing. I don't see how this will solve Grupo EBX's operational shortcomings," said Dany Rappaport, who oversees 320 million reais of investments at InvestPort in São Paulo, and who is not planning to add any shares of Batista-controlled companies soon.
Esteves comes on board after a series of EBX management shake-ups failed to boost performance and calm investor concern that missed construction and production targets would starve EBX companies, most in the start-up phase, of cash to fund operations and pay debt.
For example, at EBX's largest company, OGX, Batista has fired since June the chief executive officer, chief financial officer and exploration director. Many OGX drilling projects are now behind schedule and production lags expectations.
"Eike is a manager who has set high goals for managers and then fired them when they can't deliver, and this hasn't worked," Telles said. "Esteves has good management people with administrative experience available to him. Whether Eike will follow his advice is yet to be seen."
Telles believes Batista's motivation for the deal with Esteves is more to help ease his own financial obligations with EBX companies, rather than fixing management problems.
Batista has long said he is more interested in developing new projects and selling them than actually running his companies. He prefers to invest profits in new projects.
Thus the "X" in the EBX group company names. The X reflects his ideas about "the multiplication of wealth." It has been a trademark since at least the 1990s when he created TVX Gold in Canada as a way to invest his earnings from Brazilian gold mines in the 1980s. A decade of growth after selling TVX in 2002 now seems at an end.
Last year, Batista was ranked by Forbes Magazine as the world's seventh-richest man, with a net worth of $30 billion. Setbacks, including lower-than-expected output from oil wells operated by OGX, delays in the construction of ports in southeast Brazil and an economic downturn, have cut his net worth by $19.4 billion
This month, Forbes said Batista's $10.6 billion fortune made him the world's 100th-richest man, a ranking that pushes him out of Latin America's Top 10.
Brazil's richest man is now Jorge Paulo Lemann, a Swiss-Brazilian financier who helped build Anheuser-Busch InBev SA (ABI.BR) into the world's largest beer maker and recently led a group that includes Warren Buffet in a bid to buy H.J. Heinz Co HNZ.N for $23 billion.
Esteves is known for his passion for deal-making and the partnership with Batista will likely strengthen his reputation as Brazil's leading investment banker. Since the 1990s, the mathematician-turned-banker has overseen some of Brazil's most impressive takeovers and corporate restructurings.
Units of BTG Pactual (BBTG11.SA), a blend of common and preferred shares of the bank's investment banking and private equity divisions, rose 2 percent to 35 reais on Thursday.
(Additional reporting by Guillermo Parra-Bernal, Danielle Assalve; Editing by John Wallace and Andre Grenon)