BTG Adding to $2.3 Billion Bet on Retail: Corporate Brazil

BTG Adds to $2.3 Billion Bet on Retail Demand
The acquisitions are taking place as growth in the world’s second-largest emerging economy falters, contributing to the 15 percent drop in the Bovespa index this quarter. Photographer: Dado Galdieri/Bloomberg

BTG Pactual Participations Ltd’s acquisition of Leader Participacoes SA, Brazil’s fourth consumer-related deal in a week, represents a bet that record low unemployment and rising incomes will reignite the economy.

BTG, the Brazilian investment bank that went public last month, said yesterday its private-equity arm will buy 40 percent of Leader with an option to take 30 percent more of the furniture and clothing retailer in 90 days. The plan brings the total for announced acquisitions in Brazil’s consumer industry since May 24 to $2.3 billion, including Diageo Plc’s purchase of cachaca brand Ypioca, Thomas H. Lee Partners LP’s agreement to buy Fogo de Chao Churrascaria LLC, a barbecue chain, and General Mills Inc.’s takeover of Yoki Alimentos SA.

The acquisitions are taking place as growth in the world’s second-largest emerging economy falters, contributing to the 15 percent drop in the Bovespa index this quarter. While economic activity contracted in each of the first three months of 2012, the nation’s unemployment rate fell in April, workers’ average incomes rose and the central bank is forecast by analysts to cut interest rates for a seventh straight meeting today.

“We have a very positive view of the domestic demand and economic growth,” Carlos Fonseca, BTG’s merchant banking chief, told reporters on a conference call yesterday. “We are very optimistic, especially taking into consideration this tendency of the reduction in interest rates.”

Economists surveyed by the central bank cut their forecasts for Brazil’s economic growth this year for a third week. Gross domestic product will expand 2.99 percent in 2012, according to the weekly survey published May 28, after posting growth of 2.7 percent last year.

Discount Widens

The slump in the benchmark Bovespa index has made consumer-related stocks in Brazil cheap relative to global peers. The price-to-book ratio for shares in the MSCI Brazil/Consumer Discretionary Index fell to 1.62 on May 23, an 18 percent discount to the MSCI World/Consumer Discretionary Index, the widest gap in seven years. The ratio has since climbed to 1.70.

Three consumer stocks are among the 10 best performers in the 68-share Bovespa since the beginning of the year. Sao Paulo-based Hypermarcas SA jumped 24 percent since the beginning of 2012, while Cia Hering, located in Blumenau, rose 27 percent. Lojas Renner SA, based in Porto Alegre, climbed 21 percent.

BTG declined 2 percent to 26.38 reais in Sao Paulo. It has fallen 16 percent since its IPO on April 24.

BTG Strategy

The Leader acquisition is in line with Sao Paulo-based BTG’s strategy of focusing on companies with potential to grow in the expanding economy, Fonseca said on the conference call.

BTG’s private equity unit said it bought a minority stake in Brazilian physical-fitness chain Bodytech on April 30, without disclosing the amount of the acquisition. It also has a minority stake at Brazil Pharma SA, a retail pharmacies chain.

Finance Minister Guido Mantega announced on May 21 a stimulus package worth 18 billion reais that included reduced reserve requirements so lenders can boost credit for car purchases, cuts on vehicles tax and more subsidized funding from the state development bank to companies that invest in equipment. The economic activity index, a proxy for gross domestic product, unexpectedly declined in March, after falling in January and February.

Government Stimulus

While the government’s stimulus has focused on higher priced items, such as vehicles, Brazilians continue to buy lower priced goods, driving retail sales to a 12.5 percent increase in March from a year earlier, the largest jump since March 2010.

Central bank President Alexandre Tombini said last week that record low unemployment and wage increases, along with credit growth, are helping sustain domestic demand even as economic growth slowed.

Brazil’s unemployment rate declined in April to 6 percent from 6.2 percent the month before, while workers’ average income rose 6.2 percent from a year ago to 1,719.50 reais a month, the national statistics agency said on May 24.

“Aside from Brazil’s economic performance, some sectors are more attractive than others, and the consumer sector is one of these,” Silvio Laban, professor of marketing at Insper business school in Sao Paulo, said in a telephone interview. “What moves consumption is income and employment, two variables that so far are giving positive signs.”

Diageo, based in London, said in a May 28 statement it will pay 900 million reais for the brand and some production assets from Ypioca Agroindustrial Ltda., located in Fortaleza, as it expands in faster-growing emerging markets.

“Brazil is an attractive, fast-growing market for Diageo with favorable demographics and increasing disposable incomes,” Diageo Chief Executive Officer Paul Walsh said in the statement.

Falling Rates

GP Investments Ltd., a Brazilian private equity fund, agreed to sell the restaurant chain Fogo de Chao to Thomas H. Lee Partners, a Boston-based private equity firm, according to a Brazilian regulatory filing May 29.

General Mills, the maker of Cheerios cereal and Yoplait yogurt, agreed to buy food maker Yoki Alimentos, located in Sao Bernardo do Campo, for about 1.75 billion reais to more than double its Latin American sales, according to a company filing. The acquisition will give Minneapolis-based General Mills nine brands with more than 600 items, including popcorn, soups and seasonings, and boost its Latin American sales to more than $1 billion.

While interest rates are falling and the government is encouraging more borrowing, Brazilians’ debt load is climbing. Debt totaled a record 43 percent of earnings in the 12 months to March. Households in Latin America’s largest economy spend 22.3 percent of their income paying debt, up from 19.8 percent a year ago and compared with 10.9 percent in the U.S., the latest data from the nations’ central banks show.

Growth Platform

Traders expect the Brazilian central bank to reduce the benchmark Selic rate to a record low of 8.5 percent today, according to the median estimate of 63 economists surveyed by Bloomberg. Brazil has cut borrowing costs 350 basis points, or 3.5 percentage points, to 9 percent, since August.

With Rio de Janeiro-based Leader, BTG’s private equity unit is taking on 72 stores, with plans to open about 19 more, Fonseca said. BTG sees some “strategic acquisitions” for Leader, and wants to expand the company beyond the eight states where it is located now, Fonseca said.

“This company brings into our portfolio a growth platform” in the retail sector, he said.

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