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When Portugal's legendary tycoon António
Champalimaud decided to sell his banking interests he gave his son
Luís a leading role in the negotiations. As António is 81 and has
failing eyesight this delegation of power to younger blood made
sense. The problem was that Luís didn't much want to sell.
Luis Champalimaud
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In a way this was not surprising. As
president of Banco Pinto & Sotto Mayor (BPSM), the group's
major asset, Luís, like the rest of the family, stood to gain
materially from the sale but he alone was likely to lose his job
and position at the centre of Portuguese banking. Potential buyers
say that when they negotiated with António things went well, but
when they got into more detailed discussions with Luís the project
stalled.
Given António's business acumen it could be that this was
part of a clever negotiating strategy. However, it had the effect
of dragging the talks out for years and nearly scuppered the
initiative of Spain's Banco Santander Central Hispano (BSCH), the
eventual buyer of Champalimaud's other banking assets, though not
BPSM.
The breakthrough that put the deal back on track was a chance
meeting by senior bank executives at a conference in Nice, France.
They discovered that there remained considerable interest on both
sides in doing a deal, and relayed this message back to their
bosses. With Luís outside Lisbon during subsequent negotiations, it
took only weeks to agree initial terms.
But it took a further five months before a radically altered
deal finally received the blessing of the Portuguese government,
and only then after intervention by European Union competition
commissioner Mario Monti and the threat of legal action.
Now, instead of BSCH taking a 40% stake in the holding
company for the Champalimaud group, the assets have been split.
BSCH controls two banks in the group - Banco Totta & Açores and
its mortgage subsidiary, Crédito Predial Português. The rest of the
group - including BPSM, insurance company Mundial Confiança and
investment bank Banco Chemical Finance - has been sold to state
savings bank Caixa Geral de Depôsitos (CGD).
Unexpected controversy
Jardim Goncalves
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Although the sale of a Portuguese bank
to a Spanish entity was always bound to cause fireworks, no-one
could have expected that the Champalimaud deal would become the
most controversial European takeover of 1999. It raises key banking
issues in Europe such as the extent to which national banking
sectors are truly open to foreign buyers; the degree to which
market forces rather than government decree determine what happens
in European business; the fair treatment of minorities and the lack
of coherent takeover procedures in Europe.
The takeover also enjoyed the unique distinction of casting
almost everyone involved in a bad light. The Portuguese government
came out looking protectionist; other Portuguese bankers appeared
to be working hand in glove with the government; the EU seemed to
apply its rules more strictly in small countries such as Portugal
than in larger countries; BSCH showed lack of concern for
minorities and António Champalimaud changed his mind about his
original aim of building up a Portuguese-owned banking and finance
group.
Luís Champalimaud comes out looking almost the best. He may
not be the world's greatest banker and the group was losing some of
its 14% market share. Critics say the banks needed to modernize
systems and customer relations.
But efforts had been made to integrate the back-office
operations of BPSM and subsidiary Banco Totta & Açores to
increase efficiency, work that will now be wasted as the two banks
have landed up with different owners. Perhaps Luís's instincts not
to sell had some merit in them after all.
Expectations of resale
Pina Moura
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Luís's fears about his job may also be
well founded. BPSM is now in the hands of CGD and the expectation
is that it will be sold again, going back into the private sector.
But it may not happen before April when the term of the current CGD
chairman, João Salgueiro, ends. One of those tipped to replace him
is Alipio Dias, a former chief executive of Banco Totta, who is
known to have clashed with Luís and may not be too sympathetic
towards him. Currently Dias is a member of the board of Banco
Comercial Português (BCP) which is still hoping to buy BPSM from
CGD.
Banco Totta has ended up with BSCH, of course, and Luís might
not have made out any better over there. BSCH will probably appoint
a new CEO for the bank but intends to keep both the Totta and
Crédito Predial names, as well as still using the Santander name in
Portugal. Had Luís been part of this operation he may well have
been pushed aside.
BSCH's top man in Portugal is Antonio Horta Osório, a
Portuguese national, who previously worked for Goldman Sachs and
Citigroup, and is the brains behind the acquisition of the
Champalimaud assets. Regarded as the country's most dynamic
investment banker, he previously ran BSCH's Brazil operations and
was the architect of the first deal that incurred the wrath of the
Portuguese authorities, and the second deal designed to placate
them.
It was Horta Osório who attended the conference in Nice where
a chance meeting with Carlos Tavares, vice-chairman of Banco
Chemical Finance, the former Champalimaud investment bank,
restarted talks between the two sides. The informal discussions
between the two men, some of it on the tennis court, may have
prevented the Champalimaud banks from going to BSCH's Spanish rival
BBVA, then only BBV, which was also interested.
Later, at the end of May, Tavares and Horta Osório had a more
serious meeting over dinner at the Ritz in Lisbon. They were
alarmed to discover, the next day, that the Portuguese press was
speculating about a Champalimaud/BSCH merger. Their fears of a leak
proved false, however, and the journalists had only inadvertently
stumbled on the truth and took the story no further.
There was genuine surprise for many in Portugal when on June
7 Champalimaud and BSCH issued public statements announcing their
deal. A few days later they signed a shareholders' agreement with
some of the clauses suspended, waiting for the approval of the
authorities.
This first deal was extremely complex and caused concern
among analysts because of its combination of a share swap that
would not have given BSCH a majority stake in Mundial Confiança and
the banks that it controlled (BPSM, Banco Totta & Açores and
Crédito Predial Português) with a shareholders' agreement providing
operating control of retail banking.
Their objection was that BSCH would get effective control
without buying a majority and was not offering the same deal to
minorities in Mundial Confiança as was being given to Champalimaud
via the holding company.
This would have been possible because of the old vertical
structure of the Champalimaud group (see diagram) with the family
holding company at the top controlling everything below. The
original plan was that António Champalimaud would receive 1.5% of
BSCH (giving him a liquid share to distribute among his heirs) in
exchange for giving BSCH 40% of the family holding company, swapped
at prices giving Champalimaud a 100% premium.
The holding company's major asset was its 44.3% stake in the
listed Mundial Confiança and since these changes were taking place
at the holding company level BSCH was not obliged to offer anything
to minority shareholders in Mundial Confiança.
Further aspects of the deal were of concern to minority
shareholders. One was an agreement that BPSM, 53.1% held by Mundial
Confiança, would buy 48% of BSCH's 100-branch subsidiary in
Portugal and 20% of BSCH's Brazilian activities in exchange for
shares or cash, but giving BSCH a 13.3% stake in BPSM. The
controversy surrounds the value at which these assets would have
been sold, and even analysts most favourable to the deal believe
greater discounts were required to make it fair. As things stood
BSCH would have clawed back roughly e110 million of the e280
million ($280 million) premium paid to the Champalimaud group.
Unfair to minorities
Under the deal the ownership of Banco Chemical Finance would
have been split between BSCH and the new Champalimaud structure but
management would have stayed with Champalimaud, which would also
manage Mundial Confiança. There was also an agreement whereby if
the other 60% of the holding company owned by Champalimaud were
sold, BSCH had the first right of refusal at a comparable price. If
it didn't buy, it had a tag-along agreement to sell its holding to
the new buyer at the same price. The feeling among many analysts is
that at some point BSCH would have ended up owning the entire
company.
The verdict of most analysts is that the deal was unfair to
minorities but perfectly legal, and that had it come to a court
battle between the Portuguese government and the European
Commission, the EC would have won. In opposing the deal few believe
that such things as minority rights, or even problems of prudential
supervision as stated, were the issues worrying the government. The
idea of a Portuguese bank being sold to the Spanish was anathema to
nationalists in the government, and other Portuguese bankers were
against it because they also wanted to buy the assets and feared
that under BSCH's management the Champalimaud banks would provide
them with stiffer competition.
A number of regulatory objections were raised, such as that
prior notification of the purchase of the insurance company stake
was not given and that the proposed joint-control structure posed
prudential concerns because it was not clear who was in charge of
what.
However, the government's case was weakened by the way it
openly worked with other Portuguese bankers to find an alternative
solution. It showed a lack of commitment to allowing market forces
to prevail and clung on to the old-fashioned way of doing things by
decree and to the benefit of insiders.
"Our view is that the first deal did not satisfy the rights
of the minorities, at least in the short term," says Miguel
Sequeira, director of Portuguese investment bank Banco Finantia.
"The deal was thought out to avoid the complications and cost of
offering fair terms to minorities."
In the longer run the minorities could have gained from the
improved management of BSCH and, on this basis, some analysts
supported the original deal.
"BSCH management's credibility will extend to BPSM and we
expect the traditional value gap between BPSM and the peer group to
close," wrote Salomon Smith Barney analyst Iñigo Lecubarri last
June. "Stock market concerns over transfer of value away from BPSM
minorities are overdone."
Despite this, most analysts remained concerned. "Formally it
was acceptable, morally it was questionable," says a Lisbon-based
observer. "This kind of deal could never happen in an Anglo-Saxon
legal environment where there are better safeguards."
Most Portuguese bankers were opposed to the deal and shortly
after its announcement the leaders of Portugal's other leading
banks went openly to meet finance minister António de Sousa Franco
to voice their objections. They included CGD's Salgueiro; Jorge
Jardim Gonçalves, president of BCP; Artur Santos Silva, president
of BPI; Ricardo Espírito Santo Silva Salgado, president of Banco
Espírito Santo and Vasco de Mello, chairman of the board of Banco
Mello and Império which was sold last month to BCP.
Claims that this was really a meeting of the Portuguese
bankers association with the minister are hard to believe, since
other association members such as Banco Santander Portugal (the
Portuguese subsidiary of BSCH), BPSM, Banif and Deutsche Bank were
not invited.
There was talk at this time, whether in the meeting with the
minister or not, of a
soluçao nacional(national solution) to what was regarded as
the national problem of a Spanish bank taking over a Portuguese
one. Ricardo Salgado later told the Portuguese press: "The three
largest banks [Espírito Santo, BCP and BPI among the private-sector
ones] were ready to take in equal parts the position that would be
taken by Banco Santander [BSCH]." Jardim Gonçalves has always been
lukewarm on the idea of a national solution but, as the creator of
Portugal's most successful private bank, his ambitions were almost
certainly larger than this.
On June 18 finance minister Sousa Franco announced his
administrative decision to oppose the BSCH/Champalimaud deal,
citing the advice of the regulatory bodies - the Bank of Portugal,
the insurance regulator Instituto de Seguros de Portugal and the
securities regulator Comissão do Mercado de Valores Mobiliarios. He
also mentioned several times Portugal's national interest and that
strategic sectors vital to the economy and financial system should
not be interfered with.
Sousa Franco said: "A restructuring of the Portuguese banking
system will be necessary and it appears to me good sense that, in
the first phase, as is already happening in France, this is done
among national groups. Foreign groups, including BSCH, will have to
compete on their own and should not perturb such a restructuring.
It would be totally false to arrange the system by suddenly
transferring control of large national institutions to foreign
owners."
Launch of a hostile bid
In opposing the deal on June 18 the minister also alluded to
an alternative offer that he said had his support. The idea that
the government was working in concert with the private sector in
opposing the deal was given further impetus with the suspension,
when the stock market opened that day, of Mundial Confiança's
shares. Later on, BCP launched its hostile takeover bid for the
entire stock of the insurance company. This offer represented an
80% premium over the market price of Mundial Confiança the previous
day.
But it also tried to take advantage of the decision by the
Instituto de Seguros de Portugal to limit António Champalimaud's
voting rights in Mundial Confiança to 10%, even though he owned 50%
of the stock. The institute took this measure because it claims it
was not properly notified of the bid.
Jardim Gonçalves is adamant that this bid, and two later ones
for BPSM and Crédito Predial Português, were all independent and
without government influence. "When we heard the news that the
Instituto de Seguros would be against the deal and had the
signature of the minister - because Instituto de Seguros is not
autonomous - we used that opportunity to make a public offer."
"It wasn't against Champalimaud, it wasn't against Santander,
it was an opportunity, the market knew and it wasn't a surprise.
Obviously we spoke with the authorities, but only one or two days
before while waiting for the decision of the government. We weren't
asked to do it and we didn't do it in favour of the government. It
was autonomous."
A source close to BCP says that as soon as the minister's
announcement was made a call was put to the stock exchange
forewarning it of the coming bid. For that reason the shares were
suspended before the bid went ahead.
The government maintains that its main concern was
supervisory and BSCH's nationality was not a factor. "The
regulatory authorities thought that control would not be clear
because it would be shared by Champalimaud and BSCH and it wasn't
clear which was the head company," says António Nogueira Leite,
secretary of state for treasury and finance. "We would not have had
any regulatory problems if Champalimaud had wanted to sell
everything to BSCH."
The European Commission was not prepared to accept this
situation. It saw the government's stance as flouting European
rules on the free movement of capital within the European Union and
asked for the decision to be reversed. The minister refused and
reaffirmed his decision in August. The European Commission referred
its complaints against Portugal to the European Court of Justice. A
long, slow legal process seemed in prospect that would pay little
regard to the fast pace of the business on which it was due to
pronounce.
The European Commission accepted none of the government's
prudential concerns or worries about the structure. In a
confidential report obtained by
Euromoney, giving reasons for the decision, the commission
says: "Such a structure does not appear to raise any concern from a
prudential point of view, in particular because it has not been put
into doubt that the persons that will acquire a qualifying holding
in Mundial Confiança SA are of good repute and have the appropriate
professional qualifications or experience... BSCH is a well-known
financial entity which controls already two banking subsidiaries in
Portugal, duly authorized by the Portuguese authorities..."
The report gives examples of financial institutions with
similar joint control structures in other European member
countries, such as Allgemeine Deutsche Direktbank, jointly
controlled by BGAG and ING in Germany. The report says that proper
notification was given to the authorities and that in any case this
would not be grounds for opposing the deal. BSCH's argument about
the notification is that it did keep the government informed at all
times.
However, this kind of debate is academic as far as the
minorities were concerned and no-one - neither the government nor
the commission - was really standing up for them.
The European Commission does not have full regulations to
protect minority shareholders, and takeover rules between member
states have not been harmonized so its instrument for deciding
whether a deal is acceptable or not is fairly blunt. This explains
why it was prepared to accept the weak compromise thatwas finally
agreed on in Portugal.
"We followed our policing role as much as we could," said a
commission spokesman. "The original deal satisfied commission
merger regulations and should have gone ahead. We don't have any
preferences as to whether an institution should be public or
private."
Looking for a way out
The new government of prime minister António Guterres was
elected in October and Joaquim Pina Moura was made finance
minister. Initially, the new government confirmed the position of
its predecessor over the BSCH/Champalimaud deal, but by now
everyone was looking for a way out of the impasse. BSCH, in
particular, was reluctant to go through with a deal that the
Portuguese authorities objected to even if it had European law on
its side.
The solution was for all of Champalimaud's 44.3% stake in
Mundial Confiança, plus António Champalimaud's personal 7.5%
holding, to be sold to BSCH for Es301 billion ($1,520 million)
payable in BSCH shares. This gives him a stake of 4.14% in BSCH.
Then BSCH will sell the holding in Mundial Confiança to CGD,
but buy back the 94% stake that BPSM has in Banco Totta and the 58%
stake that Totta has in Crédito Predial. BSCH will pay CGD Es320
billion in cash, or cash and BSCH shares up to Es220 billion, and
Caixa will pay Es253 billion to BSCH for the parts it will keep -
BPSM, Mundial Confiança and Banco Chemical Finance. Both CGD and
BSCH will make full offers to the relevant minorities.
António Champalimaud has the right to appoint one board
member each to BSCH, the investment bank Santander Investment and
to Banco Santander in Brazil, which might make a nice job for Luís
since the family used to live there.
BSCH ends up controlling banks with an 11% market share
rather than having participation in banks with a 16% share. BSCH's
previous retail share in Portugal was 2%, so it's a big move
leaving its rival BBVA way behind.
With this deal the EC was persuaded to drop its court action;
the limitation on Champalimaud's voting rights was lifted; and
everyone was prepared to accept this solution, despite the fact
that parts of the group were effectively being nationalized. It's a
strange solution to aproblem caused, from the commission's point of
view, by an alleged lack of adherence to market rules.
One line of thought is that CGD is just a temporary parking
place and that BPSM will eventually be sold back into the private
sector, quite possibly to BCP. But CGD deputy manager Filomena
Raquel de Oliveira outlines three options available to the state
savings bank: sell on all the assets; sell only BPSM and merge
Mundial Confiança with CGD's own insurance operation which would
create the biggest life and non-life insurance company in Portugal;
keep everything. Keeping BPSM would make CGD even more dominant in
retail banking, adding to its existing 27% share. CGD has long
wanted to get into investment banking and could do so using Banco
Chemical Finance although it's more likely that it will be sold to
BSCH.
"Our dominance in the Portuguese financial system would be
even bigger with BPSM but the bank has a lot of problems," she
says. "It would need a lot of restructuring." There is talk of
privatizing CGD at some stage, so BPSM might go back to investors
that way.
A man of his word
The whole charade raises the question why Champalimaud didn't
just sell BPSM straight to BCP. The reason, say Lisbon sources, is
that Champalimaud refused to sell to anyone but BSCH, having given
his word. That is why, in the finally agreed deal, everything in
the first instance went to BSCH and only later to CGD.
As with every major takeover transaction it is the
personalities involved that also determine why a deal came out one
way rather than another. With the Champalimaud/BSCH deal the
meeting of minds between António Champalimaud and Emilio Botín, the
joint chairman of BSCH, played a part in the deal's conclusion.
Both are the heads of family dynasties that have grown their
businesses to a size where they are beyond the capacity of the
family to manage them. Both have had to consider where to take the
business next - António with his decision to sell out and Emilio
with his decision to merge with Central Hispano. Both have had to
struggle against difficult odds to achieve their goals.
António and Emilio also have done business with each other
before. When Santander bought Banesto, the Spanish bank, it was
found to have an illegal holding in Banco Totta & Açores that
needed to be sold. Santander sold it to Champalimaud. This makes it
unsurprising that the two men warmed to each other.
Yet Portugal's business community is small and António
Champalimaud has connections with nearly everyone in it, either
through past business dealings or through family. On this basis he
could have sold to any of the major Portuguese banks, and he did
have lengthy discussions with most of them. His first wife was
Maria Cristina de Mello, giving him connections with the Mello
banking group. Yet it was probably too small, with only 4% of the
retail market, to buy the Champalimaud group and has since been
sold to BCP.
Historically Portugal has had three leading business families
- Mello, Champalimaud and Espírito Santo. When António got started
in business the grandfather of Ricardo Salgado, the current
president of Banco Espírito Santo, gave him finance during a
difficult period and because of this, even in the late 1990s, he
was still ready to talk and do business with Salgado. Salgado was
the only Portuguese banker that Champalimaud told personally of his
decision to go with BSCH. Champalimaud also maintains that Jardim
Gonçalves of BCP was the only one to give him a concrete proposal
for purchasing the assets and in Jardim Gonçalves' case, Antonio
negotiated directly with him.
In the end Champalimaud decided to go with BSCH and there are
three reasons why: price, the liquidity of BSCH shares, which would
make it easy for family members to sell if they wished, and the
international character of BSCH, which would bring a new dimension
to the banks. Champalimaud is an old-school businessman who
attaches great importance to integrity and boasts that he always
keeps his word. "Everything is for sale except honour," he is
reputed to have said.
In selling his Portuguese assets Champalimaud was definitely
the winner in financial terms. The second deal brought him $1.5
billion for selling his entire holding in Mundial Confiança,
whereas in the first deal he would have received e560 million for
40% (making the entire company worth $1.4 billion)."It's second
best for Santander but the winner, as usual, is Champalimaud," says
a Lisbon banker who has watched Champalimaud triumph in previous
battles over many years.
The sentiment in Portugal is that Champalimaud was helped by
the government to build up a financial empire and owed it some
loyalty. Champalimaud, however, who declined to be interviewed, may
feel that because of his treatment by past Portuguese governments
he owes them nothing.
Champalimaud built up a cement empire, and became one of
Europe's richest men, only to see it nationalized following the
Portuguese revolution in 1974. His family fled to Brazil, returning
in 1992 when in his mid-70s he started building up the banking and
insurance group. All the while he claimed compensation for assets
that had been seized from him, which included Mundial Confiança and
BPSM.
With the privatization programme under way, Champalimaud
agreed to drop his claim against the government and, in return, he
was given Es10 billion to buy Mundial Confiança, which he leveraged
to make other acquisitions, such as BPSM and Totta. In the case of
Totta he was allowed to get control without an auction. "He rebuilt
his financial group with the support of the government and now the
government feels betrayed," says a banker in Lisbon.
Champalimaud's succession difficulties were made worse when
two of his sons died. One was killed in a car crash. The other,
João de Mello Champalimaud, was murdered by a disgruntled employee.
João, referred to by António as "his right hand", was the most
gifted in a business sense and had been expected to run the group.
Selling seemed the only option. For Santander, with such a
small share in the Portuguese retail market, growth by acquisition
was the obvious way forward. But with other Portuguese banks
looking to consolidate this still gave the Spanish bank several
options. In early 1998 senior executives from Espírito Santo and
Santander had an informal breakfast meeting to discuss joining up,
but nothing came of it.
With its position in the market, its culture and its owner
control, the Champalimaud banks always seemed the best fit for BSCH
among the Portuguese banks. Discussions between Emilio and António
were followed by talks between Ana Patricia Botín, then chief
executive of Santander Investment, Horta Osório and Luís
Champalimaud. True to form, Luís was unenthusiastic about selling.
There were other reasons why the Champalimaud deal with BSCH
did not close quickly. The Russia crisis was one factor and then,
at the beginning of last year, Santander had its hands full merging
with Banco Central Hispano in Spain. With this merger the new BSCH
inherited a cross-shareholding with BCP that was part of Central
Hispano's assets.
The possibility of BCP and BSCH merging now had to be
considered but the chemistry, unlike that between BSCH and
Champalimaud, was never right. The old agreement was an
arm's-length investment in which Central Hispano agreed not to
compete against BCP in Portugal and BCP made the same commitment in
Spain. BCP wanted the same kind of deal with BSCH, whereas the
ambition of BSCH is to be one of the world's leading brand names in
banking. There was little in the way of common ground.
According to one version of events BCP wanted BSCH to swap
its stake in Santander Portugal for shares in BCP that would have
taken the holding over 20%, but would not have allowed it any
members of the executive (management) board. The Santander name
would have been removed from the retail part, although BSCH would
have controlled investment banking. No resolution was possible so
the two sides bought back each other's holdings. That left the way
clear for BSCH to do a deal with Champalimaud that was put back on
course when Horta Osório and Carlos Tavares, himself a former
executive with BCP's investment bank, met in France.
That might have been the end of the story had the Portuguese
government not objected. The EC rushed to the defence of the single
market, apparently unconcerned if private assets ended up in state
hands. Tough tactics were employed by all parties.
Shadowy minorities
Minority shareholders made their dissatisfaction felt, but
sometimes it was unclear who they really represented. An
extraordinary general meeting called by BCP to get approval for its
bid for Mundial Confiança had to be rescheduled after minorities,
believed linked to Mundial Confiança, discovered procedures had not
been correctly followed and threatened court action.
Minorities in Mundial Confiança, unhappy about the first
deal, also called for an EGM. But later it was noticed that some of
the stakes were held by funds managed by BCP. Mundial Confiança
minorities took out full-page advertisements in the
Financial Timesand
Wall Street Journalaccusing the insurance company's board of
not protecting their interests. The board responded by threatening
to sue them for libel.
In October Antonio Champalimaud, apparently wedded to the
BSCH deal, said that he might sell to BCP if they offered him "a
barrel of money". This remark added e500 million to the banking
group's value until Champalimaud explained that he was joking. But
according to Jardim Gonçalves, Champalimaud was still prepared to
sell to BCP right up until the second deal was done.
He says: "Champalimaud wanted to do the best business and he
got to do the best business. He was in contact with the government,
with Santander and with BCP [in reaching the conclusion over the
second deal]. He would have sold to us if the price was right and
the government had maintained its veto [over the BSCH purchase]."
The Portuguese government backed down and some in Lisbon feel
that the EC turned on them because Portugal is a small country that
could be used as an example. Financial sectors in major European
countries such as France and Germany are hardly open to foreign
acquisitions, they point out.
As one analyst remarked: "This was a deal for politicians and
bureaucrats, not for bankers."
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