Review: Lawyers can be dirtier than oil companies

26 Sep

Rogue lawyers can be more dangerous than the oil business. That is the conclusion one draws after reading “Law of the Jungle,” a new book by Paul Barrett that tells the story of how Steven Donziger, a brash American lawyer, won a $19 billion pollution judgment against Chevron in Ecuador’s courts by using bribes, intimidation and fraud.

The spoiling of a swath of Ecuadorian Amazon jungle is well known. For decades, state-owned company Petroecuador and its junior partner Texaco pumped a fortune in oil from the Lago Agrio region leaving behind pools of crude sludge, contaminated water and scores of sick farmers. Texaco left in 1993, and was soon sued by indigenous tribes seeking retribution. Chevron inherited the Lawofthejungledispute when it bought Texaco years later.

Barrett’s book puts the scandal in context. For starters Petroecuador ran the show and took more than 90% of the revenue obtained from the oil that both companies produced. During its nearly 30 years in the Andean country, Texaco abided by Ecuador’s admittedly weak environmental rules. After leaving Ecuador, Texaco also spent $40 million in a woefully inadequate cleanup, and Ecuador’s government signed off on it. But the deal did not shield the U.S. oil company from lawsuits by aggrieved indigenous communities that blamed Big Oil for their troubles.

That’s where Donziger came in. He convinced indigenous Ecuadorians to file a class action lawsuit against the U.S. company, and he recruited Hollywood stars, and anyone else who would go along, to trumpet the case as a David vs. Goliath story. His problem was a lack of enough solid evidence to blame Chevron for the polluting practices that Petroecuador continued to employ for years after Texaco had left the country. This didn’t stop Donziger.

Barrett’s prose turns the convoluted legal spat into an engaging narrative of malfeasance. He shows readers how Donziger’s team coerced a judge into appointing a handpicked environmental damages “expert,” how Donziger paid a consultant to write a report with wildly inflated cleanup estimates, and finally how his team ghostwrote the judge’s own ruling. Donzinger’s people even promised the judge $500,000 to rule against Chevron.

Such egregious actions no doubt explain why Chevron won a racketeering case against Donziger earlier this year. Barrett generously paints Donziger as a well-meaning lawyer who lost his way. The book unearths one of Donzinger’s most telling personal notes, in which he admits feeling “like I have gone over to the dark side.”

He did far more than that. By choosing not to prosecute Petroecuador for its lead role in polluting the Amazon, Donziger let the Ecuadorian government get away with its rotten oil pumping practices. His zealous pursuit of Chevron’s big pockets promoted the idea – prevalent in poor nations – that big business is solely responsible for the plight of the poor. And he did more than most to further corrupt a Latin American country’s legal institutions. In doing this, Donziger became an unwitting example of the abusive American intervention the region’s leftist leaders often denounce.

* ”Law of the Jungle: The $19 Billion Legal Battle Over Oil in the Rain Forest and the Lawyer Who’d Stop at Nothing to Win It,” by Paul M. Barrett was published this week by Crown.

Coke bottler may find Brazil market still has fizz

2 Jul

coca_rueda_4Coca-Cola Femsa may find that Latin America’s largest consumer market still has plenty of fizz. The Coke bottler’s $448 million purchase of Companhia Fluminense de Refrigerantes, at 11.2 times operating earnings, was a sound deal. Middle class Brazilians may no longer stomach corrupt politics, but they continue to gulp more Coke. The transaction may usher more deals among Brazilian bottlers.

For KOF, the world’s largest Coke bottler, acquiring Fluminense, a small Brazilian bottler, implied no wallet-busting effort. The all-cash deal was the smallest in dollar terms of its last six acquisitions. Indeed, the purchase marks KOF’s return to more conservative investing. For starters the deal’s 11.2 times earnings multiple sits in the mid range of what KOF has typically paid for bottlers over the past three years, according to Credit Suisse estimates. Plus, it is a sound price to pay for Fluminense’s 17 percent operating returns. This is an improvement from the eye-watering $1.35 billion, or 13.5 times operating earnings multiple, KOF paid in 2012 for 51 percent of a Philippines bottler that generated just 9 percent returns. What’s more, expanding in Brazil, a familiar turf for KOF, offers considerable cost-saving advantages – nearly $14 million a year by the bottler’s own estimates.

Still, Fluminense needs work. The bottler’s operating margin falls short of KOF’s 19.3 percent estimated returns for 2013, based on data compiled by Bloomberg. Credit Suisse reckons product penetration in Fluminense’s territory reaches merely 35 percent, a far cry from KOF’s 60 percent level in its established Brazil operations. Already Coke consumption per capita in Brazil lags behind Mexico, home to the most soda-thirsty consumers in the world. But sales growth is still there. KOF’s soft drink sales in Latin America’s largest economy have risen an average of 2 percent a year since 2010, despite weak economic growth. KOF’s record of strong management could do much to improve Fluminense’s outlook.

But perhaps the more most interesting aspect of the KOF deal is its timing. Brazil has lost its former shine as the go-to destination for investors. The country’s Bovespa equity index is down nearly 26 percent this year, making it the worst performer in emerging markets. And protests by a middle class fed up with ineffective government continues to scare off investors. That KOF chose to expand at a time of turbulence suggests there may be good deals to be had in the bottling sector. With Fluminense, KOF will control 30 percent of the market for Coke in country. But with 11 independent bottlers serving 36 percent of Brazil’s Coke volumes, KOF has plenty of opportunities to continue growing.

Brazilians may be angry, but they may still have the time and money to have a coke and a smile.

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