Chile Richest Family Risks Golden Touch With Ships: Freight

Wilbur Ross
Guillermo Luksic, who became chairman of CSAV after Quinenco bought 10 percent of the company from Chile’s Claro family in March, is following billionaire U.S. financier Wilbur Ross, shown, in making a contrarian bet on the slumping shipping market. Photographer: Scott Eells/Bloomberg

Chile’s Luksic family became the country’s wealthiest by buying underperforming businesses and turning them around. With shipping company Cia. Sud Americana de Vapores SA, it may have lost its way.

Quinenco SA, the Santiago-based holding company controlled by the Luksic brothers, said Sept. 2 it would buy as much as $1 billion of a $1.2 billion share increase in CSAV, Latin America’s largest container shipping company. That will probably give the Luksics control after shareholders approved the transaction today. Since the announcement, shares in CSAV, as the company is called, have slumped 45 percent.

Guillermo Luksic, who became chairman of CSAV after Quinenco bought 10 percent of the company from Chile’s Claro family in March, is following billionaire U.S. financier Wilbur Ross in making a contrarian bet on the slumping shipping market.

With world stock markets and global growth both slowing, it will take a “very long time” for the purchase to pay off, if ever, said Jorge Rios, an analyst for Santiago-based Corpbanca, Chile’s fourth-largest bank by market value.

“This company is generating value destruction,” said Rios in a telephone interview. “There is no way the stock is going up in the short term.” Rios has a “hold” rating on the shares and said he will change that to “sell” within a month.

Valparaiso, Chile-based CSAV lost $525 million in the first half of this year on the slowing global economy, rising fuel costs and a worldwide glut of vessels, after earning $171 million in 2010. Third-quarter losses will be close to the $339 million posted in the second quarter before a recovery begins in 2012, the company said in a statement on Sept. 26.

‘Vital’ Volatility Reduction

The stock has dropped more than 80 percent from its 12-month high on Oct. 28, 2010. The shares slid 3.8 percent to 120.99 pesos in Santiago trading today, while Chile’s main stock index advanced 2.6 percent. Quinenco, which has fallen 34 percent this year, rose 2.5 percent to 1,130 pesos today.

CSAV said today that it needs to take risks by expanding amid prospects of a recovery in the global shipping industry.

While the company’s results this year will be “very negative” and a slump in developed economies signals tough times ahead, the industry has an “attractive” longer-term outlook, Oscar Hasbun, head of container shipping at the company, told shareholders in Valparaiso today. Losses will continue into the first half of next year, he said.

‘Difficult Moment’

“It’s an attractive industry passing through a difficult moment,” Guillermo Luksic said today at the same meeting. “Ninety percent of the world’s commerce moves around in boats.”

CSAV didn’t respond to requests for comment about the share purchase. It did say the capital increase “is vital to reduce the volatility of the results and improve the competitiveness of CSAV, since only by increasing the proportion of owned fleet the company may be in levels more suitable with the industry,” in a regulatory filing on Sept. 2.

CSAV said it will seek to take on a larger industry partner and plans to spin off Sudamericana Agencias & Maritimas SA, or SAAM, its port logistics business. The unit needs capital to expand, Hasbun said today.

Luksic was unavailable for comment, according to Maria Teresa Soza of b2o, a Santiago-based PR firm that handles Quinenco’s affairs.

Family Fortune

The Luksic patriarch, Andronico, who died in 2005, built the family fortune by purchasing a century-old, money-losing railroad operator in the Atacama Desert in 1980 and turning it into London-based copper miner Antofagasta Plc, which last year had $4.58 billion in revenue. Guillermo and his brothers Jean-Paul and Andronico have since expanded the family business into other areas of Chile’s economy.

In 2001, the family boosted its stake in Banco de Chile to 52.7 percent from 12 percent. The bank’s market value has risen tenfold since the acquisition to about $9.5 billion from $992 million at the end of 2001, according to data compiled by Bloomberg. Citigroup Inc. joined as a partner in 2008 and boosted its share of the Banco de Chile holding company, LQ Inversiones Financieras SA, to 50 percent in March, 2010.

Quinenco also runs Cia. Cervecerias Unidas SA, the country’s largest brewer and the second-biggest in Argentina, with Heineken NV. Annual revenue grew to $1.79 billion in 2010 from $1.12 billion in 2006, according to a company presentation prepared for investors.

Negotiating Skills

“They aren’t among the most efficient in each industry where they participate, but they know how to negotiate good relationships,” said Patricia Pellegrini, a Santiago-based analyst at Chilean brokerage LarrainVial SA.

The container-shipping industry, which had about $200 billion in revenue last year, is expected to lose between $2.5 billion and $3 billion in 2011, Philip Damas, director of liner shipping and supply chains for London-based Drewy Shipping Consultants Ltd, said in an interview in August.

“The industry as a whole burned cash in the second quarter,” said Menno Sanderse, an analyst at Morgan Stanley in London, in a Sept. 27 telephone interview. “Things are not getting better, they are getting worse.”

CSAV, including its Norasia CSAV subsidiary, is the world’s eighth-largest operator of container ships, according to Containerisation International, a London-based provider of data and analysis.

Company History

Founded in 1872, CSAV’s fleet expanded from 97 ships at the end of 2009 to as many as 147 by the third quarter of 2010, according to Clarkson Research Services Ltd., a unit of the world’s largest shipbroker.

The container-shipping market is fragmented beyond the industry leaders, Denmark’s A.P. Moeller-Maersk A/S and Switzerland’s Mediterranean Shipping Co., which use large, fuel-efficient vessels, said Diego Ocampo, a Buenos Aires-based analyst at Standard & Poor’s. He cut CSAV’s credit rating to B-from B, below investment grade, on Sept. 29.

Smaller competitors such as CSAV may have to lay up their smaller, higher-cost vessels, according to Oslo-based investment bank RS Platou Markets AS on Sept. 27.

Quinenco bought its initial 10 percent stake in CSAV from Maritima de Inversiones SA, which is owned by Chile’s Claro family. Grupo Luksic, controlled by brothers Guillermo, Andronico and Jean-Paul, bought an additional 8 percent from the Claros on April 6.

“They never thought that this year would be so bad,” Pellegrini said. She told clients to sell CSAV stock after the company lowered its outlook for the rest of the year in its second-half earnings statement Sept. 26.

Financial Strength

The family has the financial wherewithal to ride out a long shipping slump. Iris Fontbona, the widow of mining magnate Andronico Luksic, heads the clan, which boasts a net worth of $19.2 billion, according to Forbes Magazine this year.

The Luksics aren’t the only billionaires to seek opportunities in shipping in 2011. Ross, chairman of private-equity firm WL Ross & Co. in New York, is part of a group of investors that bought 30 ships hauling gasoline, diesel and other refined products for about $900 million on Sept. 27.

The industry is “relatively close” to the bottom of its business cycle, Ross told the Bloomberg Link’s Dealmakers Summit on Sept. 27.

CSAV investors must hope he’s right.

“The question is how much cash will you burn between now and when assets become expensive again,” Morgan Stanley’s Sanderse said. “You don’t have endless time unless you have bottomless pockets.”

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