Next time you have a bad day in the market, spare a thought for Eike Batista, formally Brazil's richest man, whose holdings and net worth at one point during 2012 totaled $34.5 billion.
Eike Batista worth less than $1 billion
However, he is now estimated to be worth less than $1 billion and according to some Bloomberg reports, this figure could have already fallen as low as $200 million. Although $200 million is still a sizeable figure, it is likely that Eike Batista could actually see all of his fortune wiped out as the former billionaire has vowed to payback all of his debts, stating “I will honor all of my obligations …. I won’t leave a single penny unpaid for each one of my debts.” Unfortunately, this could prove to be almost impossible as his five publicly traded companies had debts of 19 billion reais ($8 billion) at the end of the first quarter - during 2012 the companies made a combined annual loss of $1.3 billion.
The collapse of Batista's empire is a good example of how investors should not act, and sifting through the wreckage, it is pretty easy to see where things started to go wrong.
Perhaps the biggest thorn in the side of Eike Batista's conglomerate empire was the over-reliance that each individual company had on others within the group. Additionally, all of the companies were reliant on the state of Brazil as a lender of last resort and Eike Batista himself as the over-riding majority owner.
Eike Batista's oil & gas group
OGX Petroleo e Gas Participacoes SA (BVMF:OGXP3) (OTCMKTS:OGXPY), Eike Batista's oil & gas group, was supposed to be the shining star of the EBX group, but the company has missed production targets and spent billions developing oil fields that, it has been revealed, never had a hope of being cash flow positive. In theory, Eike Batista's OSX BRASIL SA (BVMF:OSXB3) (OTCMKTS:OSXRY), an offshore marine services company, was supposed to generate the majority of its orders from OGX but this has obviously not occurred as OGX in now struggling for cash to develop its assets.
Elsewhere, coal prices have collapsed, extinguishing the chance of CCX Carvao da Colombia SA (BVMF:CCXC3), an integrated coal mining company, from ever becoming profitable. The conglomerate nature of the group has meant that rising debts at CCX and OSX BRASIL SA (BVMF:OSXB3) (OTCMKTS:OSXRY) alone have left the whole EBX group struggling to support its liabilities.
Unfortunately, these mounting debts have all but annulled the highly defensive side of the EBX group, which owns such assets as real estate, power generation and AUX, a profitable gold mining company. AUX was never taken public and is 50% owned by the Qatar Investment Authority—the deal was worth US $2 billion, valuing AUX at US $5 billion. (The combined market cap of OGX and CCX, the supposed jewels in Eike Batista's empire, are now worth a combined US $654 million.)
Investors in a commodity bubble
Nonetheless, what is clear here is the fact that Eike Batista's highly speculative, unproven early stage companies took down the whole group in a risky bet, synonymous of emerging market companies and investors looking to make a quick buck from the commodity bubble. Investor's cash has been flowing into emerging market projects with the promise of a quick lucrative return, which has rarely proved to be the case. Moreover, investors have been plowing cash into early-stage commodity companies around the world ignoring the significant risk that comes with these all-or-nothing types of bets.
In summary, Eike Batista's empire crumbled because he broke three key rules that any experienced investor adheres to. Firstly, Eike Batista did not diversify, his companies were all linked and based within one economy. Secondly, he let his losses run and should have jumped ship the second it became apparent many of his early stage companies were going to fail. Lastly, Eike Batista's portfolio was dominated by speculative companies that were unproven and could not live up to their lofty growth predictions.