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Skip Navigation LinksHome :: Back Issues :: Fox looks to wake up the market

July 2001

Fox looks to wake up the market





       
Carlos Slim
Being a minority shareholder in Mexico has never been easy. Despite the promise of high returns on investments against the backdrop of long-term economic growth, the struggle for company information and a say in the running of a company can seem endless.
In the words of one US-based institutional investor, there is "a deeply entrenched disregard for minority shareholders in Mexico. Companies do not want to relinquish control. The system is stacked against us."
Indeed, Vitro, Mexico's biggest glassmaker, recently said it was considering going on a spending spree in China at a time when investors are crying out for the company to cut its $1.6 billion debt.
In the name of accountability, Mexican president Vicente Fox has signed into law a series of capital market reforms aimed at upgrading minority shareholders' rights and better protecting investors' interests. The law, which came into immediate effect on June 1, brings in five key changes.
It requires companies to bring in a capital structure made up of 75% voting shares and 25% non-voting, or restricted shares. The issuing of new stapled, or non-voting shares, is now prohibited, unless the non-voting shares convert into common shares within five years.
The National Banking and Securities Commission has been granted the power to regulate takeover deals to prevent the exclusion of minority shareholders. The new law also requires 25% of company board members to be independent. Lastly, insider trading and market manipulation are now criminal offences punishable with prison sentences.
The reforms have been applauded by some and received with a heavy dose of scepticism by others. Enthusiasts say the changes will do much to expand the size of the investor base and to encourage foreign investors to the Mexican stock exchange.
It may even wake the exchange from its long slumber.
Caught between recurrent crises and the pull of bigger markets, the Mexican exchange is notorious for its lack of dynamism. Trade volumes are down by 50% from 1994 and share prices are one-third of their value in dollar terms. Increasing numbers of Mexican companies list abroad while even domestic investors continue to steer clear.
But in a country where motorists ignore red stoplights and a policeman would rather take a bribe than issue a parking ticket, the success of the reforms depends heavily on the willingness of companies to implement them. The jury is out on who will embrace minority shareholders and who will continue to pay lip service to them.
According to analysts, companies such as global cement producer Cemex, and Comercial Mexicana (Comerci), Mexico's second-largest supermarket group, are most likely to take notice of the new law. "Cemex needs investors' capital to continue its aggressive expansion," says Gonzalo Fernandez, a construction analyst at Banco Santander in Mexico City. "It wants to be able to compete with Holderbank of Switzerland and Lafarge of France. That is its incentive for treating minority shareholders well."
Comerci has publicly said that it will transform its capital structure in accordance with the reforms. Furthermore, as a company constantly rumoured to be in talks with European supermarket groups, the chain is willing to offer minority shareholders a better deal in the event of a takeover.
Under the new law, in the event of takeover, a company must offer minority shareholders the average stock price of the last 30 days before the deal, or the book value of shares in the last quarterly report, whichever is higher.
Comerci has also said it may grant full tag-along rights to minority shareholders, which is currently only a recommendation. The tag-along rights, which would be enforced by the National Banking and Securities Commission, mean that any company wishing to purchase another is committed to offering minority shareholders the same price per share it offers majority shareholders.
Yet even these devotees may not be fully committed to espousing minority shareholder rights. Some 30% of Cemex's shares are non-voting shares. They are also the most liquid. "Cemex will be reluctant to convert these shares and give stockholders more say.
Management, which does not have many independent members, keeps tight control over the company," says Fernandez.
According to Federico Mora, a beverage analyst at Standard&Poor's in Mexico City, some companies have strategic reasons for not embracing the stock market reforms. Pepsi-Gemex, the second-largest bottler of Pepsi Cola outside the US, is unwilling to disclose information to shareholders because it fears that Coca-Cola bottlers will hear of its plans.
"The Coke-Pepsi battle for market share in Mexico means that Pepsi-Gemex closely guards the information that enters the public realm. The new law will not change that," says Mora. Of all the big Mexican companies, telecoms giant Telmex is seen as least likely to take notice of the reforms.
Although Telmex does not have stapled shares and will not have to make changes to its capital structure, analysts acknowledge that Telmex's board of directors is little more than a rubber stamp for Telmex's controlling stakeholder, Carlos Slim, one of Latin America's wealthiest men. Without competition in the Mexican telecoms market, Telmex has no reason to offer minority shareholders a better deal, they say. "Government influence will always be superficial with the power that Slim wields," asserts one US-based telecoms analyst.
Telmex's apparent lack of interest in minority shareholders is borne out by its disinclination to inform shareholders of what it will do with the cashflow it generated from spinning off its wireless businesses late last year.
In reality, the telecoms sector, which includes Televisa, the world's largest producer of Spanish-language programming, may prove to be the reforms' biggest stumbling block.
As written into the constitution, foreigners cannot have a controlling share in Mexican telecommunications companies. "This new law makes that possible by the conversion of non-voting shares to voting shares, allowing foreigners to have a controlling share. The government is going to have to do something about this inconsistency," says Albert Islas of Televisa. 52% of Televisa shareholders have non-voting shares and can only name one board member.






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