Latin America’s best managed companies results tables
AMONG THE LATIN American companies active globally are the ever-disciplined Mexico-based Cemex, the world’s third-largest cement maker; and Brazilian iron ore producer CVRD. However, these are just the biggest of a growing bunch. “Brazilian industry is putting on a show around the world,” says Alvaro Novis, chief financial officer at Brazilian engineering and construction group Odebrecht.
Last year, acquisitions by Latin American companies were worth $95.6 billion, made up of 458 deals, compared with 304 in 2005 worth $25.3 billion, according to Dealogic. So far this year, the region’s companies have made $1.5 billion-worth of acquisitions, with a strong pipeline of deals predicted for 2007. And in a market with huge potential, innovative niche players such as Chilean retailer La Polar, Brazilian miner MMX and Panamanian airline Copa are also thriving. Consolidation in areas ranging from banking to telecoms is the order of the day, as more companies tap local capital markets to expand. Indeed, IPOs in Latin America raised $10.2 billion last year, more than double the 2005 level, according to Dealogic. The number of IPOs rose to 34 from 20 in 2005 and 11 in 2004. This year there have already been four IPOs, more than in the whole of 2003. Investors like this buoyancy. Shares in Latin American companies notched up a fourth straight year of double-digit rises in 2006, their longest winning streak in at least two decades.
CVRD blazed the trail for a newly confident corporate Latin America with its $18.7 billion takeover of Canadian nickel producer Inco late last year, impressing the markets with the biggest-ever global bond by a Latin American entity and the two-year bridge loan to back the bid, which was the largest ever in Latin America. Brazilian group Votorantim has also awed investors with its smart mix of businesses, taking a strategic position in Peruvian zinc company Milpo at a time of record prices for the metal and a world shortfall in supply, and developing its forestry products arm as international demand soars. Even Brazilian steel maker CSN’s failure to take over Anglo-Dutch rival Corus in January has not dampened its acquisition potential, but rather underscores its global ambition, analysts say. There are few other big steel players to be snapped up, so CSN is likely to target small and medium-size companies. So far, it has expressed an interest in taking part in the March auction of 52% of Colombian steel maker Acerias Paz del Rio.
Brazilian banks are also on the prowl, with larger players looking to move into niche segments where they have little presence. Banco Itaú has illustrated how innovative acquisitions can be. In May, it took over Bank of America’s BankBoston unit in Brazil and in August bought Bank of America’s assets in Chile and Uruguay in exchange for a 6% share in Itaú.
New York-listed Bradesco, Brazil’s biggest private sector bank, bought small local bank BMC for $375 million in January to take advantage of the country’s fast-growing credit market, doubling Bradesco’s payroll and retirement loan portfolio. “This segment has a strong appeal, a non-performing loan ratio near zero and an immense potential for growth,” says Marcio Cypriano, Bradesco’s chief executive. The acquisition follows Bradesco’s purchase of American Express’s operations in Brazil for $490 million as it tries to increase its credit portfolio.
Bradesco in buying mode
The latest market talk is that Bradesco is now eyeing Santander Banespa, the local unit of Spain’s Santander, or even Banco Votorantim or ABN Amro Real. According to investment strategist Celso Boin at local brokerage Link Corretora, Bradesco is definitely going to buy a bank soon. Overall, lower expenses from loan-loss provisions should help the Brazilian banking sector double earnings growth to 23% compared with 2006, according to Merrill Lynch.
Cemex, which is in the throes of a $13 billion offer for Australian building materials maker Rinker, surely hopes to follow in the footsteps of Brazil’s CVRD. Many market observers would say it deserves to, given its highly professional management and eye for market-defying acquisitions in developed markets such as the UK, where it bought RMC in March 2005, setting out to revamp the ready-mix concrete firm in two years. “The year 2006 was outstanding for Cemex,” says Hector Medina, the company’s executive vice-president of planning and finance. “As we look ahead to 2007, and with the integration [of RMC] fully completed, we are well positioned to grow.”
The Rinker deal would be the biggest ever takeover by a Mexican company and more than twice the size of the acquisition of RMC for $5.8 billion. So far, Rinker is holding out for a sweeter bid and the feeling among investors is that Cemex will have to increase its bid of $13 a share. “Cemex’s bid needs to be lifted above and beyond $20 a share to achieve success,” says analyst Rohan Gallagher at Credit Suisse in Sydney. Rinker’s shares are trading at around $14, boosted by market talk of a better bid.
While some regional companies look far overseas for growth opportunities, eagerly eyeing China, Mexico’s other hungry powerhouse, mobile phone company América Móvil, knows the value of M&A nearer home. It has been lauded by investors for its decision to take on Spain’s Telefónica in a battle for dominance in Latin America, one of the world’s fastest-growing wireless markets, with more than 275 million mobile phone users at the end of 2006, double the number in 2005. Since US companies BellSouth and AT&T pulled out of the region to focus elsewhere, expansion has become very lucrative. América Móvil, voted Latin America’s best-managed company (see poll on following pages), plans to add 22 million new customers in 2007 and is buying assets in Puerto Rico and the Dominican Republic, which could generate another 10 million clients. “Twenty-two million customers [for 2007] would be a very good year,” says Daniel Hajj, América Móvil’s chief executive.
The company’s growth in Colombia alone has been outstanding, rising from a market penetration of 19% in mid-2004 to 65% in mid-2006. Total wireless subscribers grew 36% between January and September 2006 to 114 million, the latest figures available. The company plans about $3.3 billion in capital expenditure this year, up from $3 billion last year. Only in Brazil and Venezuela has progress been frustrated. América Móvil was tipped to bid for Telecom Italia’s Brazilian mobile division TIM but in January the Italian company said it had decided not to sell the business. América Móvil had also hoped to buy Verizon’s stake in Venezuela’s largest phone company in a joint venture with Mexico’s fixed-line operator, Telmex, but Venezuela’s president, Hugo Chávez, recently announced his plans to nationalize the local company.
Recovering from its crippling 2002 debt default, Argentina is gradually returning to the M&A market as the economy regains its strength. Tenaris, the world’s biggest producer of steel tubes for the energy industry, has led that rebirth with an intrepid move into the US, where it has acquired Maverick Tube. Tenaris shares appreciated nearly 100% in both Buenos Aires and New York in 2006, and local brokerages tip the stock to do extremely well again in 2007. Indeed, in Argentina there were more than 120 acquisitions worth some $10 billion in 2006, including the $3.2 billion that Tenaris paid for Maverick, more than double 2005 levels and the best performance in the past six years.
The biggest moves last year were those of InBev, removing the Quilmes family from power at brewery Quilmes; Grupo Clarin and Fintech, together taking control of CableVision; Apache, acquiring Pioneer’s local unit; and Carlos Miguens Bemberg and Merrill Lynch, together buying Total’s electricity generation assets. Tenaris’s parent company, engineering and construction company Techint, which has operations in 45 countries, continued the acquisition trend this year, buying Chilean mining engineering company Comin to give it a strategic position in Chile’s booming copper industry.
Innovation has also been the key to success in retail, especially in South America’s fast-growing Andean economies. Indeed, the insurance brokerage arm of Chilean department store Ripley launched an insurance policy for dogs in January, the first of its kind in Chile, covering a range of liabilities from expenses stemming from the loss of a dog to accident and disease coverage. Ripley has shown just how determined Chilean retailers can be, with a $120 million expansion plan set for this year to open six new stores in Peru and Chile and with plans to move into Colombia in 2008. “We have very attractive growth plans for Peru and Chile,” says Hernan Uribe, the company’s chief financial officer. “We had 20% growth last year – and we’ll be happy with 20% growth in 2007.” Ripley now operates a bank and a Peruvian finance company and is keen to grow its credit card business, tapping local capital markets to expand. The company sold $200 million in local inflation-adjusted bonds in Santiago in mid-January to finance its growth plan. La Polar has also opened a string of stores in Chile and aims to expand in Peru.
The region’s capital markets still have a long way to go to allow smaller Latin American companies to grow via acquisitions and organic expansion.The cost of credit remains high for many outside the realms of Cemex and CVRD even as a range of financial products comes to market. Interest rates in Brazil are among the highest in the world, and bank loans in the region can come with frustratingly short tenors for second-tier companies. Local bond markets do offer much better maturities, but issuing debt, debentures and equity can prove costly. “The cost of capital in Brazil is prohibitive and companies are becoming international because it means they can get financing in foreign markets,” says Bernard Mencier, president of the Brazilian unit of BNP Paribas. Votorantim, which has acquired US cement plants from Cemex, has also highlighted the need for affordable credit.
The signs of Latin America’s more determined, professional corporate culture are encouraging. Some players suffer from opaque accounts and unimpressive investor relations. Yet the majority are catching up with their developed world counterparts and in some cases are even showing them how to do business. Latin America still needs a second generation of structural reforms to improve the business climate but, most important, it will need executives who can lead the region into a new era. “If chief executives are to make the most of global opportunities for the long term, they must fully understand the realities and risks of funding their growth, working in diverse cultures, managing dispersed resources and competing with a growing set of global players,” says Samuel DiPiazza of PricewaterhouseCoopers, citing Brazil and Mexico as two of the world’s top growth opportunities for companies in 2007.
