1. Suzano Petroqumicaand the Acquisition of Polibrasil Prepared by:Daniel Sensel, Ernesto Knizek,David Nuez, Alvaro Pipino, Emilio Baltodano Presented on:February 28, 2006

2. Case Outline

Overview of the Case

Learning Objective

Information about Brazil

Petrochemical Industry

International Finance Corporation (IFC)

Cost of Capital

Valuation

What Happened

3. Overview of the Case

Suzano Petroqumica

• One of Brazils leading petrochemical companies

• • Structured as a holding company

• Began in 1974 through investments by Suzano Papel e Celulose in the petrochemical industry

• Net Sales of R$1,610M in 2004 (~ US$600M)

Investment Opportunity

• Acquire remaining 50% stake in Polibrasil, currently a joint venture with Basell International

• Polibrasil is the largest producer of polypropylene in Latin America

• • Annual production capacity of 625 ktons of polypropylene

• Debt financing required

4. Key Questions to Consider

What are the strategic considerations to pursue the merger?

What is the role of the International Finance Corporation (IFC) in supporting the project?

What is the cost of capital?

What is the value of Polibrasil?

5. Case Outline

Overview of the Case

Learning Objective

Information about Brazil

Petrochemical Industry

International Finance Corporation (IFC)

Cost of Capital

Valuation

What Happened

6. Brazil -A Brief History

11 thlargest economy in the world as of 2004

• GPD of US$785B in 2004

2002 - Brazil affected by Argentinean collapse

• Country Risk reaches all time high (see next slide)

2002 - Left-wing party candidate, Jose Ignacio Lula da Silva wins presidential elections

• Surprises skeptics by maintaining fiscal discipline, low inflation targets and favorable environment for foreign investors

2003-2005 Brazil has shown stability and resumes growth

• 4.9% GDP growth in 2004

June 2005 - mensalo political scandal erupts and threatens the presidency of Lula

7. Latin America Not for the faint of heart 8. Case Outline

Overview of the Case

Learning Objective

Information about Brazil

Petrochemical Industry

International Finance Corporation (IFC)

Cost of Capital

Valuation

What Happened

9. Brazilian Petrochemical Industry 1 stGeneration 2 ndGeneration 3 rdGeneration Polibrasil 10. 2nd Generation Producer

Currently a fragmented industry, with over 50 producers

• Consolidation already under way

Petrobras is the main supplier of raw materials (naphtha)

• Raw materials make up 70% of COGS

Currency risk is hedged in the medium/long run

Opportunity to become aconsolidatorin the petrochemical market 11. SuzanoPetroqumica Holding Company

Opportunity to simplify the organizational structure

Bring company closer to capital markets

12. Polypropylene Strong market potential

High correlation between petrochemical demand growth and GDP growth.

• elasticity is estimated to be from 3.0 to 4.7x

• GDP projections of >4% CAGR

Low penetration rates

13. Demand vs. CapacityA lot of opportunity, but significant investment required 14. Case Outline

Overview of the Case

Learning Objective

Information about Brazil

Petrochemical Industry

International Finance Corporation (IFC)

Cost of Capital

Valuation

What Happened

15. Significant Investment Required

BNDES (National Development Bank)

• Considering that the sustained growth of the economy will requiredinvestments in production capacity of approximately $12Bto meet internal demand for petrochemical products throughout 2013.

• It becomes essential theprovision of fundsto make viable the realization of the different proposed projects, with the support of the BNDES, and other institutions such as the BID, IFC, CAF, and export credit agencies.

16. International Finance Corporation (IFC)

IFC is a member of the World Bank Group

IFCs mission is to promote sustainable private sector investment in developing countries, helping to reduce poverty and improve peoples lives

In order to be eligible for IFC funding, a project must meet a number of IFC criteria:

The project must be located in a developing country* that is amemberof IFC.

It must be in the private sector.

It must be technically sound.

It must have good prospects of being profitable.

It must benefit the local economy.

It must be environmentally and socially sound, satisfyingIFC environmental and social standardsas well as those of the host country.

Source: IFC Website

17. The Role of the IFC in the deal

The IFC is not only directly funding additional polypropylene capacity, but creating an agent that can drive further consolidation and investment in the industry.

The IFC can also help promote an increased transparency in corporate governance

For Suzano Petroqumica, having the IFC as a partner in the project gives international seal of quality.

Catalyst for improvement in the region 18. Case Outline

Overview of the Case

Learning Objective

Information about Brazil

Petrochemical Industry

International Finance Corporation (IFC)

Cost of Capital

Valuation

What Happened

19. Cost of Capital The Country Risk Rating Model

We used the following data to calculate the Cost of Capital:

• U.S risk free rate of 4.00% (10-year treasury on Jun-2005)

• U.S risk-premium of 3.68% (average from 2000 to 2005)

• U.S credit-rating of 92.45 (March 2005)

• Brazil credit-rating of 46.7 (March 2005)

• Industry BETA of 0.97(Chemicals industry BETA in the US)

Based on the variables above, we reached aICCRC of 19.76% and a Country Risk-Premium of 12.08%. 20. Cost of Capital Project Adjustments 21. Case Outline

Overview of the Case

Learning Objective

Information about Brazil

Petrochemical Industry

International Finance Corporation (IFC)

Cost of Capital

Valuation

What Happened

22. Valuation

In order to find the fair value of Polibrasil, we employed 3 methods of valuation:

• Discounted Cash Flow (DCF)

• Comparable transactions

• Comparable companies

A few important points with regard to the valuation:

• Pro-forma estimates provided by Espirito Santo (September 5 th )

• We used an exchange rate of R$2.72 to the USD, (30 day average prior to the transaction date of December 31, 2004)

23. Valuation APV Method 24. Valuation Discounted Cash Flow

In conclusion, through our discounted cash flow analysis the value of Polibrasil is of $243.7M.

25. Valuation -Comparable Transactions 26. Case Outline

Overview of the Case

Learning Objective

Information about Brazil

Petrochemical Industry

International Finance Corporation (IFC)

Cost of Capital

Valuation

What Happened

27. What Happened?

Jun/20/05 - Acquires remaining 50% stake of Polibrasil for US$253M

• Becomes largest polypropylene producer in Brasil

• 2 ndlargest thermoplastic resin producer

• Project underway to expand PP capacity to 875 ktons

Sept/01/05 - Agreement with the International Finance Corporation to fund acquisition, plus US$40M for expansion project

Broader Financing package allows extension of debt maturity from 2.5 to 6 years

• Better positioned for cyclical nature of the industry

28. The New SuzanoPetroqumica

Dec/01/05 Completes corporate restructuring that effectively transforms company into aoperatingcompany

Engaging consolidation as one of the largest players in the sector

29. QUESTIONS?