Saturday 12 October 2013

HBS case study on societe distribuidora de petroleo (SAT)

Specifications (adapted from Harington, Dryden Press, 1993):
1. Case Background and Statement of the Problem
In only a paragraph or so, give the context of the case, the timing of the case and explain concisely the central problem(s).
2. Analysis
This is the ‘heart’ of the case, and it should constitute half or more of your total write-up. It should contain a detailed examination of all relevant data, a description of your analytical approach(es) (i.e., what tools did you use?), and a discussion of the strengths and weaknesses of the approach(es). The analysis should provide a solution to the main problem(s) identified earlier.
3. Alternative Courses of Action
Elaborate on the courses of action available to the decision maker. Be creative, but be realistic. Consider complications which could possibly be introduced by intangible, ‘human factors.’
4. Recommendation(s)
Take a definite stand: from among the alternatives you proposed, recommend a specific course of action for the decision maker, and make sure that your position is well-defended.

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AUGUST 14, 2007
________________________________________________________________________________________________________________
Professors Lynda M. Applegate of Harvard Business School and Andr
ea M. A. F. Minardi of Ibmec Sã
o Paolo prepared this case. HBS
cases are
developed solely as the basis for class discussion. Cases are not in
tended to serve as endorsements, sources of primary data, o
r illustrations of
effective or ineffective management.
Copyright © 2007 President and Fellows of Harvard College. To order co
pies or request permission to reproduce materials, call 1
-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication m
ay be
reproduced, stored in a retrieval system, us
ed in a spreadsheet, or transmitted in any form or by any means—electronic, mechani
cal,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
LYNDA M. APPLEGATE
ANDREA M. A. F. MINARDI
Satélite Distribuidora de Petróleo
In February 2002, Marcelo Alecrim,
the owner of Satélite Distribuidora de Petróleo (SAT), had just
started negotiating with Julio Lastres, a senior mana
ging director for the Amer
icas at Darby Overseas
Investments, Ltd. (Darby), to sell
a minority interest of SAT. Alec
rim saw the sale as a way to raise
money in order to grow SAT, improve its balanc
e sheet, build its reputation, and negotiate better
interest rates both with banks and with Petrobra
s, Brazil’s state-owned oil company. But the new
partnership would not come without a cost. Privat
e equity funds such as
Darby typically imposed
strictures on the entrepreneur’s actions and dema
nded key executive positions and board seats.
Alecrim needed to decide whether to continue the negotiation and pursue SAT’s growth
opportunities, or to allow a break in the pace
of growth in order to maintain his company’s
autonomy. What other alternatives did he have?
Brazil’s Gas Distributio
n System in 2001
With an area of 8.5 million square kilometers, Brazil in 2001 was South America’s largest country.
Industrialization since the mid 1
950s had made Brazil reliant on
highways and trucking for the
economy’s transportation needs. Fuel
, especially diesel fuel, became a critical factor affecting the total
cost of production, distribution, and the final price of
goods sold to consumers. In Brazil, only trucks
were allowed to use diesel; personal automobiles had to use gasoline or alcohol.
The government tightly controlled fuel prices thro
ughout the supply chain. To keep the price of
diesel fuel down, the government paid Petrobras
a market price for its diesel and subsidized the
lower retail price. This diesel subsidy reached $2 billion a year in 2000 according to conservative
estimates, and was partially paid for by gasoline consumers, said SAT managers, who added that
legal prohibition of self-service gas pumps meant that gas stations in Brazil employed more than
200,000 people in 2000.
From 1954 until 1996, the only piece of the su
pply chain that was not totally regulated was the
sales to final consumers. Any truck or bus driver could fuel a vehicle with diesel at a gas station, but
owners of private cars could not use diesel fuel. Pe
trobras controlled the pipes and tanks, as well as
95% of Brazil’s refining capacity, and allowed a limited number of firms to distribute fuel to gas
stations. These included international firms Exxon,
Shell, and Texaco, plus local companies such as
808-062
Satélite Distribuidora de Petróleo
2
Atlantic, Hudson, Ipiranga, Wal, Cia São Paulo,
and BR Distribuidora (a company owned by
Petrobras). Almost all of these firms acted solely
as distributors. Ipiranga, which also owned a
refinery in southern Brazil, was the only exceptio
n. Distributors were not allowed to import fuel.
All
gas stations were required to buy from one of
these distributors and fl
y the distributor’s flag.
Fernando Collor’s government started a process of
deregulation in the early 1990s that intensified
as Fernando Henrique Cardoso’s Real Plan stabilized the Brazilian economy by tying the value of the
Brazilian real to the U.S. dollar. In 1996 the go
vernment created the Agência Nacional do Petróleo
(ANP) to open the fuel distribution
sector to new entrants, forcing Petrobras to sell fuel to anyone
who wanted to operate as a distributor. ANP also a
llowed gas stations to break their exclusivity with
distributors and work as “white flags,” or unbran
ded independent entities. By the end of 2001, white
flag stations comprised 20%-25% of the market.
Unlike elsewhere in the world, Brazil’s gasoline distributors were not allowed to own gas stations.
The relationship between gas stations and a distribu
tor was ruled out by long term supply contracts.
If the distributor company changed ownership, the
long term supply contracts were transferred to
the new owner.
Deregulation also spawned smaller fuel distribu
tors with less formal business models. Through
legal instruments including injunctions, such dist
ributors battled to buy
directly from Petrobras
without paying VAT taxes. They gained the right to
defer taxes until the courts made a final ruling.
Many of these small distributors also adultera
ted fuel, mixing gasoline with solvent. The
adulteration practice is co
nsidered crime by Brazilian law, but th
e law is not always enforceable. It
may take time to punish illegal actions like fu
el adulteration. The deferral period and fuel
adulteration brought small informal distributors a cost advantage, allowing them to sell fuel at a
discount of up to 10% relative to their larger competitors, and leading Shell and YPF (which with
Agip and other foreign firms had bought into the Br
azilian marketplace in the wake of deregulation)
to cancel expansion plans. Shell transferred long-ter
m supply contracts with 300 gas stations to Agip
and announced that it would divest additional assets if such “unfair” competition continued. In
August 2000, Brazil’s Supreme Co
urt found these small players liable for unpaid taxes, thereby
rendering the informal model economically un
viable and creating opportunity for further
consolidation.
A number of new, smaller, local competitors also
tried to establish operations based on more
flexible, lower-cost models. There was an opportun
ity for these players to gain market share by
capturing gas stations that were unhappy with the
treatment they were receiving from the larger and
better established distributors, and by
offering better prices than their larger competitors. By the end
of 2000, Brazil had some 150 fuel distributors supplying Brazil’s $20 billion retail market for fuel. The
top 18 distributors accounted for 87%
of the country’s total fuel sales.
In 2001, ANP started a second phase of deregulation, allowing distributors to buy fuel from
suppliers other than Petrobras, including foreig
n distributors and petrochemical companies. The
result was consolidation within the industry, as di
stributors with significant sales capacity gained
bargaining leverage over suppliers. Agip, which entered Brazil in 1998, acquired Ipê in Minas Gerais,
a local distributor with 110 gas stations (points of sale). At the end of 2001, Petrobras and Repsol
(YPF) announced an exchange of assets whereby Re
psol received 270 long-t
erm supply contracts with
gas stations in southern Brazil, 10% of the Albacora exploration fields, and 30% of the REFAP
refinery. Petrobras in turn received 700 gas statio
ns and the Baía Blanca refinery, all of them in
Argentina. In January 2002, BG Group (British Gas) invested US $15 million in Ale, a gas distributor
with more than 430 points of sale in Minas Gerais, in order to develop 87 new fueling stations.

SatéliteDistribuidora de Petróleo
Assignment Questions:
1. If you were Mr. Lastres would you invest or would you not invest in SAT? Evaluate the investment opportunity as well as the entrepreneurial opportunities in Brazil.
2. Marcelo Alecrim also sees costs and benefits from the Darby investment. What are they?
3. Conduct a DuPont analysis of SAT’s performance.
4. What is an appropriate valuation of SAT, using comparables analysis? Using DCF analysis?
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