Friday, 23 January 2009

S&P Mulls Votorantim Downgrade On Aracruz Purchase. Merger Seems to Be Utterly Expensive and Dangerous.

Yesterday, Standard and Poor's placed its 'BBB' corporate credit rating on Votorantim Celulose e Papel on revision for a possible downgrade. At the same time, the 'BB' rating on Aracruz Celulose may be upped. Remember that last week both companies agreed to integrate (Votorantim bought a 28 percent stake in Aracruz for 2.2 billion reais; Votorantim received BNDES money to complete the transaction. The government is always there, right there, spotting wonderful opportunities to waste money at the expense of taxpayers.) The amount paid can be bigger -- and detrimental to Votorantim, -- because Aracruz's third biggest shareholder, Arainvest, has tag-along rights and therefore Votorantim will have to make an equivalent offer for Arainvest's voting shares. That would give Votorantim 84 percent of Aracruz's shares.

Obviously, a S&P action on Votorantim will follow after the ratings company figures out the real number for net debt to Ebitda that will result from the merger of VCP and Aracruz. I have seen analysts and market participants very upset at the price paid for Aracruz given its losses and the weak profit outlook for the companies. The other factor that will be gauged by rating analysts at S&P will surely be how much further access to government money (via equity or loans) will Votorantim enjoy during the completion of the acquisition. About 4 billion reais will be pumped into the new company.

I will spare you from the BS about the potential gains that the transaction brings to shareholders of both companies. Let's go straight to the point: Standard & Poor's credit analyst Marcelo Costa says ''the significant increase in leverage resulting from the share acquisition and from the losses Aracruz has reported in its derivative position would raise financial risk at the new company.'' Enough.

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