Paper Excellence, Brazil's J&F Joust Over Scuppered Deal

Paper Excellence (Netherlands) announced late this past month (Sept. 2018) that it will argue in arbitration over its attempted takeover of Brazil’s Eldorado Brasil Celulose SA. The company contends that surging pulp prices played a big part in Eldorado’s owners canceling the deal, according to documents seen by Reuters and two people with knowledge of the matter.

J&F Investimentos SA, a holding company owned by brothers Joesley and Wesley Batista, agreed to sell flagship asset Eldorado to unlisted Paper Excellence in September 2017 for 15 billion reais ($3.7 billion), with roughly half the payment due immediately and the rest a year later. The Batista brothers, the largest shareholders in meatpacker JBS SA, were under pressure to sell assets after agreeing to pay a 10.3 billion-real fine for their role in corruption scandals. The pair were also arrested in September last year and held in jail on suspicion of insider trading. But pulp prices have surged 41.5% in local currency terms since the initial agreement and the Batistas were released from jail without charge early this year.

In court documents seen by Reuters for a lawsuit that preceded the arbitration, Paper Excellence alleged that rising pulp prices played a big part in J&F wanting to call off the deal because J&F wanted a higher price. The company plans to use the same argument in the arbitration, the sources said. On August 26, people close to Paper Excellence say, J&F representatives demanded an additional payment of 6 billion reais for Eldorado at a Los Angeles meeting, potentially raising total deal value to 21 billion reais. For its part, J&F said in a statement to Reuters the dispute centers around collateral issues and not pulp prices. J&F also denied the account of the meeting, calling it an "informal and preliminary conversation" at Paper Excellence’s request to discuss the basis for a new contract as a Sept. 3 expiration deadline approached for the initial one.

The dispute marks the second time in the past year that Paper Excellence’s quest for a key Brazilian pulp asset has been frustrated. Earlier this year the company owned by Indonesia’s Wijaya family, which also controls Asia Pulp and Paper Group, lost out on a bid to acquire Fibria Celulose SA. In a statement, Paper Excellence said it will seek the rights to acquire Eldorado foreseen in the sale agreement. In August, Paper Excellence sued J&F, accusing it of dragging its feet on closing the transaction. Brazilian Judge Eduardo Pellegrinelli found in late August that the case had to be decided via arbitration. J&F formally canceled the sale of the remaining 50.59% stake in Eldorado this month, citing issues regarding 8.1 billion reais in collateral that J&F had to offer to secure 5.5 billion reais in bank loans to the pulp company. Paper Excellence had initially agreed to free up that collateral, which included JBS shares, as a condition of its acquisition of the remainder of Eldorado. But the parties split on exactly how that would happen. The dispute over the collateral was also a central issue that prevented both parties from closing the deal, three sources from both sides said. Paper Excellence suggested that the collateral could be released via a capital injection in Eldorado or by the company lending money to the Brazilian pulpmaker which could be used to repay the bank loans.

J&F, however, did not agree with Paper’s money going into Eldorado’s coffers before having collateral freed up, saying the proposed deal could change the company’s capital structure before the deal is concluded. In a statement to Reuters, J&F said it would not accept a capital injection in Eldorado under any circumstances. Their preferred solution was for Paper Excellence to swap J&F’s collateral for its own or repaying the loans directly. In his ruling compelling arbitration, Pellegrinelli also denied Paper Excellence’s request to inject funds into Eldorado, saying it could alter the balance of power between the partners.

Excerpts formatted from the original edit by Christian Plumb and Susan Thomas at the Reuters Press Agency (London, U.K.)