Bye-Bye Bolsa?

Deal fever could spell the end of Venezuela's exchange

Caracas is in the grip of M&A fever. Not a week goes by, it seems, without news--or rumor--of another deal. The flurry of mergers and acquisitions has sent shivers through the tightly knit old-boy network that is the Venezuelan business Establishment. But it has done wonders for the Caracas bolsa, which ended 2000 as the second-best-performing stock exchange worldwide. "Everybody's looking for the next takeover prey," says Luis G. Garcia, research analyst at BBV Provincial Casa de Bolsa, a brokerage in Caracas.

But this sizzling rally could, ironically, end in the death of the bolsa. As more of Venezuela's blue-chip companies succumb to the M&A wave, the local exchange is turning increasingly illiquid. The value of shares traded is already meager at around $2 million a day, down from its peak of $15 million to $20 million a day in 1997. Of the 72 companies listed, only 15 or so are actively traded. Faced with this grim trend, a group that represents 20% of the Caracas exchange's stockholders announced on Feb. 14 that it wants the exchange dissolved. "We are in the agony throes now, so let it die," says Rolando Salcedo, president of Multinvest, the Caracas based brokerage leading the shareholders' revolt.

The brokers may be trying to force a repeal of the tax on stock transactions. Salcedo argues that the 1% levy renders the local stock market uncompetitive. Indeed, by some estimates, more than 90% of trading in Venezuela's largest publicly listed companies now happens on the New York Stock Exchange, which levies no such tax.

GOING CHEAP. Whatever happens, it's an odd state of affairs for Venezuela's only exchange. It took a crippling blow in June as a result of AES Corp.'s successful $1.7 billion bid for a controlling stake in La Electricidad de Caracas, a Venezuelan utility that until last year accounted for about 40% of all stock market trading. The deal commanded attention because it was the first hostile takeover in Venezuelan memory. It also caused investors to take note of the cheap valuations of some of the country's premier companies--largely the by-product of three consecutive years of disappointing economic growth.

Bargain hunters struck quickly. Among the first was Spain's Banco Santander Central Hispano, which bought 93% of Banco Caracas in a $316 million deal in December, thus catapulting itself to the rank of Venezuela's No. 1 bank. Citibank has announced that it too is on the prowl for a local bank. Venezuelan paper producer Manpa, with annual sales of $210 million, is in talks with several suitors, including Kimberly-Clark Corp. Empresas Polar, a private food and beverage giant, has launched a $510 million tender offer for a 65% stake in rival Mavesa, the second most actively traded stock in Caracas.

Then there are the rumors. Paintmaker Corimon has seen its stock surge more than 50% since early February on takeover talk--which management denies. And speculation continues that Spain's Telefonica is interested in acquiring CANTV, the national phone company controlled by a consortium led by Verizon Communications. CANTV is Venezuela's top traded stock.

Hostile takeovers will be tough to pull off: Among Venezuela's publicly listed companies, the percentage of outstanding shares that actually trade averages just 38%. Still, several companies are taking additional steps to ward off unwelcome suitors. CANTV and Corimon, among others, have bought back their own shares to make a takeover tougher and pricier. Meanwhile, Mercantil Servicios Financieros, the holding company for Venezuela's No. 2 bank, has adopted a poison pill. This would release new stock to existing shareholders in the event of a takeover attempt, thus diluting the holding of a prospective raider.

If a handful of companies do elude takeovers, it would still not be enough to sustain reasonable trading levels on the bolsa. Should consumer products marketer Mavesa be taken private, liquidity on the exchange will take another big hit (the stock accounts for about 10% of daily trading volume). Since several bourses in Latin America are in similar straits, a regional stock market may be one way to go. Venezuelan officials have held talks with counterparts in Bogota and Sao Paulo, but nothing concrete has materialized so far. Something had better happen fast. Otherwise, there won't be much left of the bolsa to take over.

By Christina Hoag in Caracas

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