International -- Finance: Deals
Snapping Up South America (int'l edition)
As multinationals buy in, Latin companies modernize
For the holidays, the multinationals went on a shopping spree in Latin America. On Christmas Eve, New Jersey-based energy group GPU Inc. agreed to buy Argentine electricity distributor Emdersa for $435 million. A few days earlier, French supermarket giant Carrefour said it would take over Brazilian department store chain Lojas Americanas. In Chile, Citigroup agreed to buy the country's No. 2 consumer-finance company for $83 million. In just the last two weeks of the year, multinationals announced no fewer than 10 major acquisitions in the region.
They are buying on the cheap: Wild stock market swings have slashed 30% or more off prices. But they are undeterred even by the ongoing risk of devaluation in Brazil and the prospect of economic slowdowns throughout Latin America. That's because the multinationals, often major players in the region, are not just bottom-fishing but are looking to strengthen their stakes in key markets (chart). "We're talking about strategic, long-term buyers," says Bernardo Parnes, managing director of investment banking for Merrill Lynch & Co. in Sao Paulo.
The deals are drawing large chunks of direct investment into the region, in contrast to the dumping of assets by portfolio investors in Latin America and other emerging markets since Russia's devaluation. Announced Latin mergers and acquisitions jumped to $85 billion last year from $73 billion in 1997, although in Asia, M&A activity fell to $78 billion from $80 billion in 1997. Foreign buyers put up 63% of the dollars for the Latin deals, according to Newark (N.J.)-based Securities Data Co., which tracks such activity.
Wall Street firms are cashing in. New York-based M&A gurus Corrado Varoli of Morgan Stanley Dean Witter and Alberto Verme of Salomon Smith Barney helped put together the biggest deal ever in Latin America, the breakup and auction of Brazilian phone company Telebras for $19 billion last July. The sale helped make Salomon and Morgan Stanley the top M&A advisers in Latin America last year, with announced deals worth $25.6 billion and $24.7 billion, respectively.
The influx of cash is speeding up modernization, especially in Brazil and Argentina, which accounted for 75% of the region's M&A activity. New owners are raising efficIency by introducing world-class management practices and technology, especially in sectors where foreigners are becoming dominant, such as banking. Domestic companies are being forced to keep pace to survive. "The local marketplaces are becoming closer to the type of competition you see in developed markets," says Ricardo Silvagni, a partner at PricewaterhouseCoopers in Argentina.EXTRA EDGE. The plunge in asset prices has put buyers firmly in the driver's seat. In a SeptEmber privatization auction, Belgian electric utility Tractebel paid $801 million for a 42% controlling stake in Brazilian electric power generator Gerasul. On Dec. 30, it bought an additional 9% stake for just $79 million, less than half the price per share it had paid three months earlier. Following the Telebras sale, the Brazilian government had expected to reap an additional $6 billion from the auction of four fixed-line licenses to compete in its fast-opening telecom market. Now it will be happy to get $2 billion, with two licenses to be auctioned on Jan. 15 and two in March.
In the bidding for strategic assets, multinationals such as GPU have gained an extra edge from the tightening of global credit markets, which is weeding out smaller rivals. "Now, instead of getting 15 potential bidders, you get eight," says GPU's chief financial officer, Bruce Levy. "And no one is paying 50% over the second-highest offer."
The prize, despite the economic volatility of emerging markets, is the prospect of reaping better returns on Latin assets than businesses can earn in the U.S. and Western Europe. In Argentina, for example, Levy expects 4% to 6% growth, compared with 1.5% to 2% in Australia and Britain, where GPU has big investments. That's why some buying opportunities are still fetching top dollar. TheArgentine government is asking a 30% premium over market value in the auction of a 15% stake it still owns in privatizeD oil company YPF later this month. Even so, major oil companies are expected to bid, partly in hopes that the stake can be used as an opening wedge for an eventual takeover.
The influx of multinationals is turning some Latin markets into battlegrounds. In Buenos Aires' financial district, known as La City, Spanish banks are fighting for market share against Hongkong & Shanghai Banking Corp. and entrenched U.S. rivals Citibank and BankBoston. Only one of the largest eight Argentine banks is now locally owned, down from five in 1994. In Brazil, Portuguese retailer Sonae, which bought three Brazilian supermarkets in 1998, is butting heads with French group Carrefour and Wal-Mart Stores Inc. of the U.S.
For Latin policymakers, there is a downside as bottom-line business decisions are made increasingly in boardrooms in New York, Paris, and Frankfurt. Foreigners, less concerned about worries such as joblessness, are more likely to fire workers, analysts say.
The overall impact of the foreign corporate invasion of Latin America, though, is positive--and profound. Typically, while foreign owners slash the workforce, they improve conditions for employees who remain. The consortium that earlier took over Rio de Janeiro electric utility Light, led by AES Corp. and Houston Industries Inc. of thE U.S. with Electricite de France, cut payroll from 10,000 to 6,600, then introduced the company's first profit-sharing plan in 1997. And both the Brazilian and Argentine banking systems have become sounder as rich foreign buyers such as HSBC and Spain's Banco Santander have reduced therisk of bank failures.HANG ON. Partly as a defense against the invasion