Petrobras’ Distribution Unit’s Possible IPO

On 22 June Petrobras CEO Pedro Parente stated that he will soon ask the board to deliberate on an IPO for the company’s distribution arm, BR Distribuidora. In statements later divulged in the local press, Parente stressed that the timing seems right for the move, given the significant number of IPOs in Brazil this year. He refused to provide more specific details – such as the expected revenue from a potential IPO, or what percentage of shares would be up for sale. Parente stressed that more specific answers would be given only after the board debated the possibility, and that there has been no discussion over whether Petrobras would retain control of the company as a majority shareholder if the sale were to occur.


His statements reassure investors that Petrobras’ streamlining is set to continue. At a time of political uncertainty for the Temer administration, Parente’s comments also signal that he is fairly secure in his tenure as CEO. Politically, Parente is close to the center-right Brazilian Social Democracy Party (PSDB), an important ally of the government that has constantly threatened to leave the ruling coalition ever since the emergence of the corruption scandal involving Temer. Parente’s ambitious move to restart talks on selling parts of BR Distribuidora further indicates his willingness to stick around. Even if the PSDB eventually decides to defect, it seems unlikely that Temer would fire Parente, since Petrobras has been one of the few successful recoveries amid Brazil’s stagnating economy.


However, Parente’s statements also risk reviving a legal dispute. Selling a share in BR Distribuidora to private investors has been one of the most contentious issues in Petrobras’ divestment plans. In 2015, the company board approved the sale of at least 25% of the distribution unit. At the time, then Petrobras CEO Aldemir Bendine mentioned three European and Asian potential buyers, though apparently their offers were not persuasive enough to the company.


In October 2016, Petrobras resumed its plans to sell a share in BR Distribuidora, but the Union Accounts Tribunal (TCU) blocked the sale on legal grounds, arguing that the rules governing the divestment program were too loose. (Other divestments were blocked at the time as well.) After adjustments, the TCU finally allowed the divestment program to resume in March 2017. Although an IPO would be a more conservative option than a direct sale to a foreign partner, Parente is essentially reviving a potential controversy shortly after the TCU gave a green light. When questioned on this issue by the press, he stated that the current move has “nothing to do” with the previous attempts to sell shares in the unit.


In our opinion, reviving the sale is more of an attempt to seize an opportunity than a case of hubris. Currently, at risk of being ousted over a corruption scandal, the Temer administration is desperate to convince the market that it can carry out ambitious reforms, including in the oil sector. After a long period of sluggishness on the government’s part, last week credible rumors emerged that the government is likely to renew Repetro – a special customs regime in the oil sector – over the next month. In addition, a report published by the local outlet Valor Economico argues there might even be an expansion of the tax exemption regime, which would include not only oil producers and suppliers, but also “sub-suppliers” – third parties in the production chain.


The potential sale of the distribution unit is controversial mostly because the public sees BR Distribuidora as a strategic resource for the country. Last year, its annual revenue was around $86bn reais (roughly $26bn); it would rank among the country’s largest companies if it were independent from Petrobras. BR Distribuidora has the largest market share in Brazil’s fuel distribution sector, with around 8,000 gas stations throughout the country. It is also one of the main assets under consideration in Petrobras’s divestment program, which aims to raise $21bn in 2017 and 2018 to help balance the company’s budget.