Are We $BAK? Event-Driven Bet with 300-500% Upside Potential
Chemical Industry M&A is Revving Up
If you don’t know your edge, you don’t have one. Your ultimate task as a market participant is to find your edge and build a strategy around it. The strategy then determines the markets we trade and the instruments we use.
I can describe my edge with one word: catalyst. Essentially, I am an event-driven investor. I am good—or at least not bad—at finding and exploiting events that cause phase transitions. In plain language, events that prompt investors to reevaluate their views on a stock/bond, region, or industry. The result is a violent price action.
This is not another philosophical inquiry, but the monthly equity report for Researchers and Strategists. I started with rumination on edges and catalysts because today’s idea is genuinely event-driven play.
It is a petrochemical company that is left for the dead. Uncertainty blurs its future. Consider legal liabilities because of a geological disaster, a massive debt burden, and a complex ownership structure. On the other side of the scale are industry tailwinds and the company’s strategic importance.
And the question is: Are we $BAK?
A few years ago, I discovered Braskem. At the time, the lore was that the company would face imminent bankruptcy due to unbearable liabilities (financial and legal). Furthermore, the chemical industry was perceived—and I believe it still is—as completely redundant.
A perfect setup for bottom fishing.
Then, news came. In November 2023, Abu Dhabi National Oil Company (ADNOC) approached Braskem. ADNOC offered 10.5 billion BRL, or BRL 37.29 per share, for Novonor’s stake in Braskem. This is a premium of almost 100% over Braskem’s closing price on November 15, 2023, of BRL 17.68. The ADNOC offer was good enough for me to take the plunge. In other words, to buy some Braskem shares as an event-driven bet on a successful deal with ADNOC.
However, in May 2024, ADNOC abandoned its plans. This event was the signal to close the trade. In conclusion, I realized a tiny <10 bps loss on that trade, and Braskem moved from the portfolio to the watchlist.
Recent developments in Brazil and the chemical industry have made Braskem interesting again. Moreover, Braskem’s price action is, to say the least, tempting. This is a three-monthly chart:
The current price of Braskem equity is at levels not seen since the GFC. What happens is that Mr. Market is pricing only the downside and ignores the upside.
A side note: three monthly charts are pure zen. No daily drama, just how capital flows, driven by our irrationality, justified as rationality.
So, why Braskem?