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| Best M&A deal |
| Coca-Cola Femsa |
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Type of deal: acquisition of Panamco Size: $3.6 billion Date: December 2002 Advisers: JPMorgan, Morgan Stanley |
It was not a banner year for M&A in Latin America. For most of 2002, there were only three announced deals of any size: Petrobrás buying Pérez Companc in the oil industry, Pepsi Bottling Group buying Pepsi-Gemex in bottling, and Corus buying CSN in cement. When the latter fell through, the Latin M&A league tables were looking decidedly bare.
Just before the year ended, however, on December 23, Mexico’s largest Coca-Cola bottler, Coca-Cola Femsa (CCF), announced the acquisition of rival Panamco. It was the largest Latin M&A deal ever in which the buyer was a Latin company, and by far the largest Latin M&A deal of 2002. The asking price was $3.6 billion, $22 a share – a premium of 118% over the December 20 close.
Panamco’s controlling shareholders did even better out of the deal, netting $247 million in cash, $38 a share. Despite holding just 8% of the capital, they could make or break the deal, since they and Coca-Cola itself were the only holders of voting stock. And although the merger fits Coca-Cola’s strategy of consolidating its bottlers worldwide, the US drinks company was prevented from taking part in the negotiations.
“A very small percentage of the company controlled all the votes: this small group of shareholders initially did not appear interested in selling their stake,” says Nicolas Aguzin, head of Latin M&A at JPMorgan.
It’s a common situation in Latin America, and one that isn’t changing as a result of this merger. Not only did the holders of Panamco’s Class B shares get a 73% premium, the new company is also going to have a similar capital structure. The publicly traded stock in CCF will not have any voting rights either. (CCF’s shareholders will, however, have a much lower percentage of the total stock than was represented by Panamco’s listed shares.)
The driving force of CCF’s decision to buy Panamco was to consolidate its position as the leading Coke bottler in Mexico, the number two market for Coca-Cola. CCF is now the world’s second-largest Coke bottler, behind only Coca-Cola Enterprises of the US.
But while Panamco generates most of its profits in Mexico, most of its operations lie south of the Mexican border. CCF has bought an operation with a large base in central America (Panamco is based in Panama) and with bottlers in Venezuela and Colombia as well as Brazil. None of these operations is nearly as profitable as the Mexican franchise, which alone accounts for $315 million of Panamco’s $530 million in EBITDA.
So the question is whether, in paying roughly eight times Panamco’s EBITDA, CCF overpaid. The stock market thought so, marking CCF’s shares down 15%, on the grounds that synergies of $70 million or so, mostly in Mexico, did not justify the premium that CCF was paying.
There is little reason to believe that CCF will be able to make Panamco’s non-Mexican operations significantly more efficient than they already are, and the market also sees no particular benefit to having operations scattered across the continent. (CCF already operates in Argentina.)
CCF is financing the acquisition by assuming $880 million of Panamco’s debt, as well as borrowing $2.05 billion from JPMorgan and Morgan Stanley in a bridge loan: the banks will now underwrite new debt issues in both pesos and dollars. The rest of the purchase price comes from CCF’s parent, Femsa, and Coca-Cola rolling over its interest in the company.
CCF’s new bonds and loans aren’t the only hurdles left for the two investment banks involved in this deal. They’re having difficulty getting it into the Latin league tables, because Panamco, for legal purposes, was domiciled in the US. As far as Euromoney is concerned, however, this is definitely an all-Latin deal, and easily the M&A transaction of the year.
| Highly commended |
| Petrobrás |
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Type of deal: acquisition of Pérez Companc Size: $1 billion Date: July 2002 Advisers: JPMorgan, Merrill Lynch, Goldman Sachs |
When Argentina’s finances collapsed at the beginning of 2002, its largest publicly traded company, Pérez Companc, entered into debt restructuring and was obviously hobbled by the fact that it came with a large amount of Argentine country risk.
But Pérez was a jewel of a company. A diversified oil and energy concern, it had operations in Bolivia, Ecuador, Peru and Venezuela as well as Argentina.
On a valuation basis, it was a very bad time for the Pérez Companc family to sell: country risk made their company worth a fraction of what it could have been sold for a few years earlier. On the other hand, the business is capital intensive, and benefits from economies of scale. By selling out to a larger rival, the family could avoid having to pump in cash, and diversify their wealth.
Similarly, it was not the best time for a foreign company to walk into Argentina wielding a chequebook. Though Argentina welcomes foreign direct investment in principle, there’s always a lot of nationalist feeling surrounding energy companies, and nobody knew how long president Eduardo Duhalde would stay in power, what he would do while in charge, or what his replacement might have in mind. The risks that Pérez would be nationalized were serious, and political uncertainty was enough to put off most potential bidders.
However, Latin Americans, especially Brazilians, are more used to political uncertainty than most European or US companies. And, as Carlos Guimarães, head of Latin America investment banking at Salomon Smith Barney, says: “Argentina offers the opportunity to acquire market share at attractive terms.”
And while Petrobrás obviously could not know more about Argentina’s future than any other company, it has one unusual advantage over US and European rivals – it is state-owned. No-one involved in the deal will say so publicly but it would be much harder for the Argentine government to nationalize or otherwise severely constrain Pérez Companc if doing so means risking the future of the bilateral relationship with Brazil, its partner in the Mercosur trade zone.
So Petrobrás decided to buy – its first acquisition outside Brazil. The price was high. At 6.6 times 2003 EBITDA it was more than twice Petrobrás’s own multiple. But it didn’t cost much in cash terms, just $755 million in cash and $371 million in new notes issued by Petrobrás to the Pérez Companc family.
The deal was by no means easy, though. After the announcement, closing was never certain. Between those two dates, the Brazilian currency devalued by more than 25%, Brazilian spreads widened out by more than 800 basis points, and Luis Inacio Lula da Silva won the first round of the Brazilian presidential elections by a huge and insurmountable margin. But even with all that turmoil the deal closed in October, less than six months after it was announced.
| Highly commended |
| Telecom Americas |
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Type of deal: America Móvil’s acquisition of BCI and SBC’s Brazilian interests Size: $2.27 billion Date: July 2002 Advisers: Salomon Smith Barney, CSFB, Goldman Sachs |
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Telmex: north American telecom companies are |
Like so many other telecoms companies, Bell Canada International (BCI) doesn’t have the kind of access to the capital markets that it enjoyed at the height of the boom years, when it was aggressively investing in Latin America. Worse, the volatility of Latin markets has meant that the value of its investments in the region has plunged – because of falling share prices and depreciating currencies but also because of the sharp rise in the discount rates used to calculate future income.
When BCI decided to pull out and concentrate on its core domestic market, a great opportunity was presented to America Móvil, Latin America’s biggest and most successful wireless operator, to step in and consolidate its holdings in Brazil.
America Móvil, the sister company of Carlos Slim’s cash cow, Telmex, had a 42.2% stake in a joint venture called Telecom Americas, along with BCI, which owned 39.1%, and SBC, which had 18.7%. Telecom Americas had mostly Brazilian assets, but also owned stakes in companies in Mexico, Argentina and Venezuela.
So in a complex transaction, all the non-Brazilian operations were returned to their original owners. America Móvil then bought out BCI’s stake for the relatively small sum of $146 million in cash. It also took on all of BCI’s debt obligations at the Telecom Americas deal, as well as a $220 million note due in March 2003. The total value of the deal was over $2.2 billion.
Simultaneously, America Móvil exercised an option it held on SBC’s stake in Telecom Americas, bringing its control of the former joint venture up to 100%, and making it one of the biggest players in the fragmented Brazilian wireless market.
BCI and SBC are now freed of the obligation to continue pumping money into Brazil; wireless telecoms, after all, still requires a lot of capital to keep on growing.
It was a textbook example of a new trend in Latin American M&A activity – north American and European investors looking for ways to exit the region, while Latin companies, with a different attitude towards country risk, see opportunities to pick up assets at bargain-basement prices.
Seven years ago, in the February 1996 issue of Euromoney, we ran an article headlined “Did Merrill bid too low?” The subject was the mandate for the privatization of big Brazilian mining company CVRD, which Merrill Lynch had won with what we then called “a wafer-thin 1.91% success fee”.
More than six years later, Merrill brought the second and final part of that privatization mandate to a market that had radically changed. Not only had CVRD seen wholesale management changes, including the exit of CSN as the controlling shareholder group and a new CEO, but competition for Latin equity mandates had heated up enormously. Bids now come in at levels – around 18 basis points in some cases – that make a fee of almost 2% look chunky.
“The people that bid had a vision,” says Richard Rainer, managing director for investment banking in Merrill Lynch’s São Paulo office. “They knew the deal wasn’t going to happen for at least seven years.”
Rainer can laugh about it now but the history of the CVRD mandate can’t have been easy for him. The second tranche was scheduled and aborted twice before it finally happened. The first time it collapsed because of a market downturn, the second because BNDES, the Brazilian national development bank that owned the stake being sold, was uncomfortable with the way management was positioning CVRD.
CVRD, or Companhia Vale do Rio Doce, is certainly a complex company to try to sell. Even after having been streamlined and rationalized by a team from consultant McKinsey, it’s far more than simply the world’s largest producer of iron ore. It also produces bauxite, alumina, aluminium, gold, kaolin and potash; owns and operates several railroads and ports; has stakes in steel and fertilizers companies in Brazil and abroad; and owns two hydroelectric power plants and is building seven others. Altogether, it has more than 50 affiliates and subsidiaries, and the parent is listed in São Paulo, New York and Madrid.
By the time of the share offering, the dot-com bubble had inflated and burst. “We’re lucky in the sense that after the internet boom, people were looking for old-economy stories again,” says Rainer. And although country risk was definitely an issue, in some senses it was a help. With CVRD having more than 80% of its revenues in dollars, and 70% of costs in reals, anything that leads to a weak currency is good news for shareholders.
A problem, though, was that the controlling minority shareholders of CVRD were not willing to dilute their voting rights. “So long as we can go out with management that can clearly communicate the story, we overcome pretty easily the whole issue of control,” says Rainer. Even so, the fact that by far the biggest equity issue in Latin America last year had little in the way of minority rights does not bode well for equity markets in the region as a whole.
Notwithstanding that Merrill received over $5 billion in institutional orders for the deal, it still sold half of the shares to Brazilians, overwhelmingly retail investors taking advantage of a relatively modest 5% discount given them by the government.
The transaction went smoothly: the stock was priced at $24.50 (a 5.6% premium to the stock price at filing), rose 10.2% on the first day to close at $27, and continued strongly for the next couple of months, until extreme volatility in Brazilian assets started dragging it down. It never dropped below $21.50, however, and is now above $27 again. In the meantime, it has also been paying healthy dividends. Brazilian stocks in general, by contrast, are still well below where they were a year ago.
That said, it’s unlikely the market is going to see further stock issues along the lines of CVRD’s soon. Although BNDES still has big stakes in many Brazilian companies, Brazil’s new government is showing no rush to sell them off. And with equity valuations in general still very low, it could well pay to wait a while. The mandate that Merrill Lynch received more than seven years ago could be its last for a while.
| Best debt restructuring deal |
| Hylsamex |
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Type of deal: loan and bond restructuring Size: $1.4 billion Date: April 2002 Adviser: CSFB |
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Steel from Mexico: Hylsa forges back after |
For the past couple of years, Mexican steelmaker Hylsamex has been the troubled subsidiary of a troubled conglomerate, Alfa. Steel prices have been low and leverage high. To make matters worse, it had spent $700 million of borrowed money on direct reduced iron (DRI) technology, which is powered by natural gas, just as gas prices spiked. With DRI now unaffordable, cashflows were reduced by 65%.
So Hylsamex decided to embark on a full-scale restructuring of its debt of about $1.4 billion. Most of this was at the Hylsa subsidiary, which manufactures steel. It had borrowed $1.2 billion, mainly to finance the investment in DRI. There was a small amount of debt at the Hylsamex level, and the rest was held by Galvak, Hylsamex’s galvanizer.
Of the total, most – some $850 million – was bank debt, held by just over 30 banks. The biggest creditors were JPMorgan Chase, Citibank/Banamex, Bancomer (part of Spain’s BBVA) and Hypovereinsbank.
In protracted negotiations it was agreed that Hylsa would retain just $326 million of its debt, and interest would be capitalized rather than paid out for the first two years. Another $216 million would be moved up to the Hylsamex holding-company level; in return, it would get a measure of security by being collateralized by stock in Galvak.
Alfa converted its own $40 million loan to Hylsamex into equity, and bought back $188 million of bank debt at a discount.
But before the bank restructuring could take place the banks needed consent from Hylsamex’s bondholders, who held $300 million in paper maturing in 2007. Hylsamex offered them an exchange at the same time – they could extend their maturity by three years in return for a 125 basis point increase in their coupon, to 10.5%. If bondholders consented to the restructuring, they would get $5 for every $1,000 of bonds they held; if they exchanged their bonds as well, they’d get $10.
It didn’t take Hylsamex long to receive the 50% bondholder consent it needed to change the old bond’s covenants and go ahead with the loan restructuring. But the exchange offer was extended several times, first to make sure all of the banks were on board and then to find the small amount of new money that was needed to make the whole restructuring work. In the end, just over 53% of bondholders exchanged, with a much greater number consenting to the restructuring. Over the course of the process, the old bonds traded up more than 20 points on the secondary market.
And when the whole restructuring was finished, the total debt in the company had been reduced by more than $400 million, and its average maturity had been extended by more than three years. Furthermore, steel prices were up, natural gas prices were down, and the DRI process was up and running again. Although there are still doubts about Alfa as a whole, Hylsa once more looks a relatively solid company.
| Best investment-grade sovereign bond |
| Chile |
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Type of deal: dual-tranche multi-currency bond Size: $869 million Date: April 2002 Advisers: Salomon Smith Barney, Deutsche Bank |
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Santiago: even by Chile’s high standards |
Chile never has any difficulty issuing debt. It doesn’t need the money, it has a solid investment-grade credit rating and it’s thousands of miles from the volatility of the US corporate sector with which it competes in the high-grade market. These are the sorts of factors that make investors desperate for Chile’s paper on those rare occurrences when it comes to market.
But even by such high standards, the dual-tranche bond that Chile issued in April was an astonishing success – as well as being the first ever Latin multi-currency bond, and Chile’s first ever euro issuance.
The dollar bond was impressive – five years, a 5.695% yield, for a spread of just 116 basis points over treasuries. That’s less than half the spread for Chile’s October 2001 10-year bond, and the lowest-yielding dollar bond in emerging-market history.
The euro bond, if anything, was even more impressive – a three-year e300 million note with an even lower yield of just 5.31% – just 83bp over German government debt.
The initial roadshow hadn’t given any hint of a euro tranche but reverse enquiry from three big European investors persuaded the lead managers. And the low-yielding environment was perfect for expanding Chile’s investor base.
Even so, there was education to do. “Chile is often grouped with the rest of Latin America viewed from the other side of the Atlantic,” says Michael Corbat, global head of emerging markets in Salomon Smith Barney’s fixed-income division. There hadn’t been a Chilean euro issue in two years. Previous bonds, from Endesa and CTC, had been aimed at the retail sector – investors who, burnt in Argentina, are not about to buy low-yielding Chile.
But both tranches were extremely attractive to high-grade institutional investors, which were seeing their telecom-rich portfolios melt down. “There was no place to hide for the corporate bond buyer,” says Corbat. “This was a sleep-well bond.”
The issue was unusual, then, in that it wasn’t sold as a spread-tightening prospect so much as a bond that wouldn’t melt down. “Investors would rather have single-A sovereigns than single-A corporates,” says Marcelo Blanco, head of Latin America debt capital markets at Deutsche Bank, who ran the issue. “There was an exodus from the whole high-grade asset class.”
As it happened, that story held true. The dollar bonds did widen out after they were issued but outperformed other single-A credits in the domestic US market.
And if the bonds were a safe bet from the investors’ point of view, they were even more so from that of Chile. It didn’t need the money to fill a fiscal gap but it did have $600 million of World Bank debt yielding 7% to 8% that it wanted to retire. For the first time, a country managed to issue market-rate debt below what it was paying the Bank. Once the Bank was paid back ahead of schedule, Chile actually managed to reduce its total indebtedness.
| Best high-yield bond |
| Transportación Ferroviaria Mexicana |
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Type of deal: 10-year bond Amount: $180 million Date: June 2002 Advisers: Salomon Smith Barney |
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Railroad in Mexico: TFM shareholders saw the |
Transportación Ferroviaria Mexicana (TFM) is a Mexican railway operated as a joint venture between Kansas City Southern of the US and Transportación Maritima Mexicana (TMM) of Mexico. TFM, which was privatized in 1997, provides the primary rail route in northern Mexico, linking Mexico City with Laredo, Texas, where over 50% of trade between the US and Mexico crosses.
It’s a good business: TFM controls about 10% of US-Mexican trade and annual cashflow is more than $250 million.
So it’s easy to see why TFM’s shareholders wanted to exercise the option granted them in 1997 to buy 24% of the company from the Mexican government for $255 million.
But TMM and Kansas City Southern didn’t want to raise the money themselves. They wanted it to come from TFM. (This despite the option belonging to them and not to TFM.) In many ways TFM is in better financial shape than either of its shareholders. It is certainly much better off than TMM.
TFM, unfortunately, was barred under the terms of bonds that it had issued in 1997 from issuing new debt and sending the proceeds upstream to its shareholders.
So Salomon Smith Barney had to get holders of TFM’s 2007 and 2009 bonds to agree to let TFM give the proceeds of any new 2012 bond to its shareholders.
On the face of it, the deal was bad for existing bondholders. The cost of servicing the new bonds would be borne by TFM, and the old bondholders would get diluted. On the other hand, any benefits from the new stake in the company would accrue to TMM and Kansas City Southern. “This is the cheapest equity the company will ever raise,” said one bondholder.
But it wasn’t the relatively modest consent fee that persuaded the bondholders to sign on for the one-time waiver. They were partly mollified by the tightening of covenants on both the new and the old bonds, but mainly by the way in which TFM told a compelling story, especially about the benefits of not having the Mexican government retain its stake.
TFM needed at least 51% of the holders of each of TFM’s bond issues to agree to the waiver; in the end, over 90% did. What’s more, so many of them signed on to buy the new $170 million 2012 bond that it was six times oversubscribed, and increased to $180 million. It went to 75 different investors in the end, both old and new.
In the aftermarket, TFM’s bonds performed amazingly. While similarly rated companies such as Durango priced at 95.5 and fell to 52, TFM priced at 98.60 and rose to 99.25 in the same timeframe.
Investors obviously have faith that trade between Mexico and the US will continue to grow. Maybe, at some point not too far off, they might even be given the opportunity to participate in TFM’s IPO.
| Best high-yield sovereign bond |
| Peru |
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Type of deal: 10-year bond Size: $1.42 billion Date: February 2002 Advisers: Salomon Smith Barney, JPMorgan |
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Peru: long-awaited global issue lowers country risk |
Rarely has a debut global issue been as long awaited as the 10-year $1.4 billion bond that Peru brought to market in February. The last international bond it issued was in 1928. It’s not for lack of trying by the investment banks to persuade the government that it shouldn’t rely wholly on multilaterals for external financing.
But this came to nothing until one of their own, Pedro Pablo Kuczynski, became finance minister and, amid controversy, gave the mandate for a new bond issue to JPMorgan and Citigroup. A lot of the noise was domestic. “Alan Garcia [former president and leftist presidential candidate] was just hitting Kuczynski as a way to criticize the economic programme,” says Susana de la Puente, managing director of JPMorgan’s Latin American investment banking group. But other US banks have criticized the process as well, saying it was a foregone conclusion that Morgan was going to win.
De la Puente doesn’t deny it. “We’ve been the bank of the republic for ever,” she says. At the end of November Peru’s second bond issue also came with JPMorgan at the helm and CSFB as co-pilot.
The bond went smoothly. First, a $500 million cash deal was launched with a 9.125% coupon and a yield of 9.48% for a spread of 455 basis points over US treasuries. That was comfortably inside where Peru’s Brady bonds were trading, and also inside higher-rated Colombia and the Philippines. Even so, it was more than three times oversubscribed. Next came the Brady swap, which was part liability management – it brought Peru’s nominal debt outstanding down by $330 million – but mostly a mechanism to get as much liquidity as possible for the new issue.
Now that the 10-year bond is a major component of the Peruvian EMBI spread, the first number investors look to when they want to measure Peruvian country risk has come down. Investors will discount cashflows at a rate 50 basis points or so less than they did previously and a liquid benchmark makes it possible for the first time for lenders to hedge Peru exposure.
The debut bond also came just in time for federal finances. Peru has amortizations of over $2 billion a year, which means it will have to issue an annual $700 million to $1.2 billion in bonds for the foreseeable future. The start of 2002 was the best time to get market access. “They wouldn’t be able to place a bond now” if the benchmark wasn’t already there, says de la Puente.
| Best liability management deal |
| Mexico |
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Type of deal: Brady bond swap Size: $1.75 billion Date: September 2002 Advisers: CSFB, JPMorgan |
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Mexico: rare Brady bond |
Brady swaps started out as a wonderful way for sovereigns to save money. Global bonds generally trade well inside the Brady curve, so if you issue a global and buy back Bradys with the proceeds, you reduce your cost of funds as well as releasing the collateral that was backing the Brady bonds.
After a few years, however, all the low-lying Brady swap fruit had been picked, and banks had to come up with structures such as par-for-par exchanges to persuade Brady holders that hadn’t already swapped out of positions to do so.
By the end of 2002, no-one thought that Mexico could find $1.3 billion of par bond holders willing to swap. But in September JPMorgan and CSFB found three large par bond holders interested in swapping for a new 20-year bond. Mexico issued $1.75 billion at a coupon of 8%, using the proceeds to buy back the pars.
Mexico hadn’t issued any bonds longer than 10 years at such a low cost in more than five years. The real magic of the transaction was not the cost of funds, though, but the way in which the lead managers managed to find the pars to be swapped. At least one of the holders was a fund that had been quietly accumulating pars with the intention of swapping at a profit. Another, though, was an original holder of the debt.
Mexico issued the globals at 200 basis points below the stripped spread of the par bonds, as well as realizing the collateral.
| Best loan deal |
| Grupo Empresarial Bavaria |
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Type of deal: Loan to fund acquisition of Backus Size: $318 million Date: August 2002 Advisers: JPMorgan, Salomon Smith Barney, IFC |
Colombian brewer Grupo Empresarial Bavaria bought a 24.5% stake in Peru’s Backus for $420 million in July. To fund it, Bavaria went for bank financing. The problem was that the banks wanted to extend a loan secured on Bavaria’s assets, but those assets were already pledged to Andean development bank CAF for a previous loan. To complicate matters, lead managers JPMorgan and Salomon Smith Barney couldn’t tell the rest of the banks that the loan was to pay for an acquisition.
The first step was to persuade CAF, which had strong security coverage on its loan, to amend its deal to allow for sharing of the security. To make the loan even more secure, it was structured as an A/B loan with the International Finance Corporation, an arm of the World Bank. The B loan – the part syndicated to international banks – is actually participation in a bigger loan from the IFC, which remains the lender of record. Bavaria is perceived as less likely to default to the IFC than to a private bank.
And the borrower wasn’t the parent firm, but individual breweries in Colombia, Ecuador and Panama.
After shoring up the structure in this way, Bavaria managed to achieve an average life on the loan of about four years.
The Bavaria deal was no ordinary A/B loan. Other institutions wished to participate in the structure but didn’t fit the IFC’s criteria. There was the Export Development Corporation (EDC) of Canada, which got a C tranche to itself. Then there were domestic Colombian and Panamanian banks, for which a D tranche was created.
In the end, the IFC borrowed $70 million in an A tranche, as well as an extra $30 million on the C. A syndicate of international banks split the $145 million B, and the EDC signed on to the C for $25 million. Colombian and Panamanian banks came up with $48 million for the D. Altogether, $318 million was raised.
