DealTalk: Petrobras’s Galp hopes face price, pact risks

By Stephen Jewkes and Andrei Khalip

MILAN/LISBON (BestGrowthStock) – Petrobras’s (PETR4.SA: ) hopes of buying Italian oil major Eni’s (ENI.MI: ) cornerstone stake in Portugal’s Galp (GALP.LS: ) may be scuppered by a complex investor pact and discord over a price tag that could top $5 billion.

Brazil’s state-run Petrobras (PBR.N: ) said last week it is considering buying Eni’s 33.34 percent stake in Galp, expanding its deepwater exploration globally.

“Petrobras is mulling the idea but it’s still early days, especially with the new government transition under way. So far no price evaluation has been made,” a senior source close to the deal told Reuters.

A deal would give Petrobras more control over Brazil’s deepwater finds and a refining beach-head in Europe. Stakes in big Brazilian oil finds have propelled Galp’s market value to 11.3 billion euros ($14.9 billion).

Eni, which has said it is not interested in keeping minority stakes in listed companies, confirmed this week it is mulling a possible sale of its Galp stake to Petrobras.

Rome-based Eni is one of Europe’s most highly geared big oil companies and could use proceeds to cut debt and keep dividends flowing. But with oil prices strengthening it is in no rush to sell and could hold out to unlock more asset value.

Galp’s current market capitalization gives the Eni stake a market value over 3.7 billion euros. Eni paid 900 million euros for the stake, and has never revalued it.

According to Portuguese business daily Diario Economico, Petrobras has offered 3.5 billion euros for the Eni stake while Eni wants to sell it for 4.7 billion euros.

“The value of Galp’s (Brazilian) fields will be much higher as commercial production draws nearer in 2012-2013. Eni can wait since it’s not desperate for cash. Certainly it’s unlikely to sell for the price Petrobras is mooted to be offering,” ING oil analyst Jason Kenney said.

Eni, the world’s No.7 non-government controlled oil company with a large exposure to gas, has already reaped 1 billion euros from dividends and tax credits from its Galp stake.

STATE BLESSING

Any sale by Eni would almost certainly need the blessing of the Portuguese state, which owns 8 percent. Galp’s operating exposure to Brazil means Petrobras could be a suitable partner.

Galp is already a partner of Petrobras in offshore exploration and production operations and the Brazilian company could see significant synergies.

It could also use Galp’s downstream assets as a platform to ensure it has a market for its crude when, as it expects, Brazil becomes a net oil exporter in coming years.

That said, Petrobras is already committed to a massive capex plan of around $220 billion (2010-2014) and despite raising $70 billion last year in the world’s biggest share issue could be in need of more capital if Eni prices its assets highly.

“We’ve seen several transactions on Brazilian oil assets in 2010 where valuations were high, while Petrobras itself got its capital hike away at a good price by valuing its assets richly. They can’t now underpay similar assets,” a Milan banker said.

The sale of Eni’s Galp stake has been a topic of speculation for almost a year and is now back on the agenda after the December 31 expiry of a lock-in pact between Eni, Parpublica, a Portuguese state company which manages government equity and real estate holdings, Portuguese state bank CGD and Amorim Energia, co-owned by Portuguese tycoon Amorim and Angolan state oil group Sonangol.

However under the agreement, if a third party makes an offer for the Eni stake – which until March 2014 Eni can only sell as a single block – the other pact members have either a pre-emptive right to buy or a tag-along right to join the sale to the third party.

A buyer of the stake might also have to launch a bid for the whole of Galp. Under Portuguese law a sale of a stake over 33.3 percent triggers a compulsory bid.

An authoritative source told Reuters the sale of even a single share could trigger a bid but acknowledged it was a controversial issue.

(Additional reporting by Denise Luna and Elzio Barreto in Sao Paulo, with Tom Bergin in London)

($1=.7609 Euro)