Foreign Investments | «Eikemania is Over»

Source: Folha de S.Paulo

Crisis at the X Group Raises Doubts Abroad

For U.S. investors and analysts, The collapse of the businesses led by Eike Batista is an example of the problems of the Brazilian economy: “Both businesses had great potential, but neither is yielding the promised returns.”

Most experts interviewed by the Folha point out that there are any number of Brazilian success stories that compensate for the decline of the X Group, but said they fear populist responses by the government. For these sources, the period of Eikemania is over.

Eikemania is a creative translation of mine.

“The decline of Eike’s stocks and other securities was accelerated by the recent wave of protests. No one imagines now that the government can save the business. It would be highly unpopular to rescue a billionaire at this point,” said Daniel Sensel of JPMorgan .

“Eike promised more than he could deliver.” His companies are heavily indebted. Investors perceive that the companies will never grow as large as expected.

A major American investor who operates in Brazil and China called Eike “the Brazilian Donald Trump.”

Most experts interviewed by the Folha point out that there are any number of Brazilian success stories that compensate for the decline of the X Group, but said they fear populist responses by the government. For these sources, the period of Eikemania is over.

“The decline of Eike’s stocks and other securities was accelerated by the recent wave of protests. No one imagines now that the government can save the business. It would be highly unpopular to bail out a billionaire at this point,” said Daniel Sensel of JPMorgan .

“Eike promised more than he could deliver. His companies are heavily indebted. Investors perceive that the companies will never grow as large as expected.”

A major American investor who operates in Brazil and China called Eike “the Brazilian Donald Trump.” A source who asked to remain anonymous,as a number of investors did, recalled a lengthy interview with Eike on 60 Minutes two years ago.

In an extensive special report on Brazil, Eike said the Americans “need to wake up to the existence of Brazil; you still think our capital is Buenos Aires.” The investor says that since then Eike, Eike has grown arrogant and proved himself a great salesman, but was slow to demonstrate results.

Uncertainties

Reflecting the uncertainties of the foreign investor about Brazil, many asked questions of this reporter before issuing an opinion. They asked whether the wave of protests would last much longer, wondered about the job security of the federal treasury minister, and considered whether there might not exist other Eikes.

To Robert Lafranco, editor of the Bloomberg billionaire index, “the decline of Eike is as shocking as though Amancio Ortega [owner of the Spanish fashion house Zara] lost his fortune suddenly.”

“The petroleum he promised was not delivered, while gold and iron prices are falling. He was once a smooth-talking insurance salesman, but now the creditors are coming after him.”

National Impact

Among analysts, those familiar with Brazil say that Eike should have a “minimal” impact on Brazil’s public image. Those less familiar may have a different impression.

“Interventions by Dilma in the electric companies or the weakening of the real have much more impact on the national image than Eike does,” says Sensel.

“The same would be true if Dilma were to adopt populist measures that affected the performance of businesses or increased regulation in certain sectors.”

The growing activism of regulatory agencies such as ANATEL (telecom), ANVISA (health care), ANEEL (electricity), ANTT (transport) ANP (oil and gas) and the CVM (capital markets) under Dilma-Lula is a story that needs fleshing out. These tend to be viewed as instances of Big Government and abhorred.

A Crédit Suisse report touches on this growing pessimism. The projected GNP for this year was cut from 3% to 2%.

Analysts at the bank cite “unfavorable dynamics”, such as reduction in foreign investment in response to political instability, the weakening of the real and the attendant inflationary pressure, and economic deceleration in China. They also believe that there is growing consumer mistrust in companies.

As part of an extensive special report on Brazil, Eike said the Americans “need to wake up to the existence of Brazil; you still think our capital is Buenos Aires.” The investor says that since then, Eike has grown arrogant, proving himselfas a great salesman, but slow to demonstrate results.