Poll leaders go for a global presence
Results | Methodology and industry key
A TEAM FROM a big US bank performing an IT review on an Argentine company said their clients were astonished to discover that senior management at the company, steel pipe manufacturer Tenaris Siderca, “flew coach [class]”.
Abandoning corporate jets – even business class on scheduled services – and parochial attitudes might be a big step for some companies in Latin America. But as Tenaris has taken fourth place in Euromoney’s inaugural survey of best-managed companies in Latin America it’s clear that the market rewards companies willing to take such steps. The conventional wisdom that Latin American companies are inefficient, family run and confined to their own continent is now at best half-true; and for the most ambitious the goal is not to achieve parity in the global market but to become leaders in it.
“We deliberately sought a listing on the NYSE as well as in Argentina, Italy and Mexico,” says Tenaris’s director of investor relations, Nigel Worsnop. “In order to become market leaders we sought to apply high standards of transparency.” That implied using IFRS accounting standards.
Tenaris, which ranks fourth overall and best in Argentina in Euromoney’s survey, was formed from a Mexican and an Argentine company, but its HQ is now in Luxembourg and officials are zealous in promoting it as a global rather than a Latin America-based organization. With demand from commodity-hungry markets such as China and India increasing, companies such as Tenaris and Brazilian steel manufacturer Gerdau are taking advantage of increased revenues to reposition themselves as worldwide players by acquiring underperforming assets and turning them around.
“Gerdau was able to generate cashflow in Brazil and then invest in the assets of US companies nearing bankruptcy,” says Joe Bormann, Latin American corporate analyst at Fitch Ratings. “As a result they’ve made impressive inroads into the US steel market, and you’d have to assume they’d want to expand further.”
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Barbosa, CVRD: the company’s priority is organic growth, not acquisitions in developed countries |
The overall winner of the survey, wireless telecoms company América Móvil, has expanded from Mexico to cover almost all of southern and central America. “All our energy is focused on increasing our wireless coverage in Latin America,” says CFO Carlos García Moreno. “The key to this success has been the discipline in our acquisitions. Other companies can tend to overpay for assets just to get their strategies moving, but we are patient and wait for opportunities to arise.” Revenues for 2005 totalled Ps182.2 billion ($17.2 billion), with operating profits up 38.8% to Ps33.7 billion. This is “breathtaking growth that results from outstanding management and investment in technology,” says analyst Xavier Escala of asset manager Banif Investimento México. “I have visited countries where América Móvil operates and seen how successfully they implement their strategy and their new technology. It’s a simple policy, but not many companies do it.”
García Moreno says that “since there are further opportunities for consolidation in Latin America, América Móvil has no immediate appetite to go outside the region”. However, the company already considers that its 93 million wireless subscribers make it a global player in terms of sheer size.
Expansionist goals
It’s not just larger companies that have ambitious plans for expansion. Brazil’s Natura Cosmeticos, which wins the survey’s consumer goods category, has established a popular retail line in the upmarket Printemps department store in Paris despite competition from better-known domestic brands.
According to one analyst, Natura turned down an offer from Printemps’ main rival, Galeries Lafayette, to sell its Ekos line. “Natura has successfully marketed its products as high-end, despite the stigma usually associated with a direct seller from a developing country,” he says. “They could go on to capture some of the market in Germany or the UK.” Natura has even turned the ostensible disadvantage into a selling point by marketing its products as rainforest-sourced and eco-friendly: its website refers to cosmetics that create “a harmonious, pleasant relationship with oneself and one’s body”.
| García Moreno, América Móvil: ”All our energy is focused on increasing our wireless coverage in Latin America” |  |
It is clear from speaking to analysts that harmonious relationships between management and investors are a common feature of all of the top 10 companies in the survey. It’s less easy to discern cause and effect. Are some companies doing well globally because they are already relatively transparent? Or is it that companies determined on building a global position are compelled to adopt higher standards of corporate governance as they seek to expand? Either way, political stability is a key prerequisite for growth – especially for smaller companies such as Natura that are still run solely out of Latin America. Companies based in more market-friendly countries, such as Chile, Brazil and Mexico, have an advantage over those that operate in more volatile business environments.
Manuel Escudero, a broker at Chilean investment bank IM Trust, stresses the importance of this background. “If there’s a framework of legality allowing companies to do their business, they can attract foreign investment,” he says. “Foreign domestic investment can help to balance the inequalities in the LatAm region if governments provide the laws to make this happen. Conversely, if crude oil prices went down, then companies in countries such as Peru, Ecuador and Venezuela would be much more severely affected because they have generally been managed in an irresponsible fashion in recent years.”
The ups and downs of oil
Escudero hints at the reason why oil companies are noticeable by their absence in the survey results. Brazil’s Petrobras scrapes into the top 10 but analyst Marcello Milman at Brazil’s Banco Espírito Santo Securities is still unimpressed. “The management of LatAm oil companies is among the worst,” he says. “Governments are usually involved with oil companies in the region, and with the business booming for them management is a secondary concern. If you compare Petrobras with [Brazilian mining company] Companhia Vale do Rio Doce, both are benefiting from high commodity prices but CVRD performs much better because its management is superior.”
If government-run oil companies are content to benefit from the oil bubble and are not seeking to tap their full potential, as several analysts indicate, so be it: the message from Euromoney’s results is that there is a correlation between successful global expansion and responsible corporate governance that ambitious companies in the region would do well to note.
A policy of aggressive acquisition isn’t the only way to take advantage of the commodities boom. CVRD, for example, came third in the overall poll and captured the top spot in Brazil with a policy of organic growth and an improved debt profile that resulted in a vital investment-grade rating in 2005.
“This year we are investing $4.6 billion, but none of that is for acquisitions,” says Fabio de Oliveira Barbosa, CFO of CVRD. “Our priority is not to invest in developed countries but to grow organically. Our shareholders are empowered, we’ve replaced hybrid debt instruments that didn’t reflect real CVRD risk with bonds appropriate to our investment grade, and we’re aiming for even greater transparency.”
That’s empowerment to the tune of $1.3 billion – the minimum dividend announced for 2006 by CVRD’s management. So the shareholders have a right to feel satisfied with their decision in 2001 to permit the management to pursue long-term strategic goals in return for greater transparency in the company’s accounts.
CVRD’s $1 billion 2016 bond, the largest ever from a Brazilian company in global capital markets, was 2.5 times oversubscribed. If this keen interest in such a large issue reflects increased confidence in Latin American companies, the risk remains that investors keen to cash in on the boom will be overhasty in pulling out at the first signs of trouble.
One analyst at a major investment bank certainly thinks so. “We have investors calling all the time, wanting to get into the [Latin American] market,” he says. “They’re demanding 40% returns, they’re excited but I think panic could ensue if there’s a major credit event. A lot of these investors still think of Latin American companies as slightly backward, and because they’re not necessarily that knowledgeable about the region they won’t get to the second level of information should the present boom show signs of halting. They’ll just get out fast.”
García Moreno at América Móvil is certainly optimistic. “From an economic standpoint, the risk of volatility is much greater when fundamentals are weak,” he says. “Right now, fundamentals are strong, inflation across the region is generally under control, nobody is really running unbalanced accounts and there are no major issues of public debt. Despite the proximity of elections the peso and the real are strong: the outlook for the region is extremely positive.”
The one issue analysts can’t seem to agree on is whether Euromoney’s best-managed companies are at the forefront of a genuine revolution in standards of corporate governance across Latin America. “More and more LatAm managers are studying at international business schools, so we’re going to see them copying international standards,” says Juan Jose Vasquez, analyst at Bull Market Brokers in Argentina.
Argentine broker Allaria Ledesma’s economic analyst Fabrizio Gatti disagrees. “Is this the start of a trend for more transparent management in Argentina?” he ponders. “I don’t think so. Governments in this region are not serious about stamping out corruption. They use the press to apply pressure but their ultimate interest is in the economy. So long as it’s working, they don’t care how.”
The best-managed companies in Latin America as highlighted by Euromoney’s survey broadly correspond, as one would expect, with those that have posted the strongest performance in recent years. If, as García Moreno contends, “the world’s economy has become truly global, with capital flowing much more freely”, there is every incentive for Latin American companies to step up their standards of governance, sell off those corporate jets and break into the world market.
