Spain’s Latin America Assets Threatened by Back-to-Back Seizures
Grupo Ezentis (EZE) is a Spanish engineering company that builds and runs phone and power-cable networks in Spain and Latin America. “About two-thirds of the company’s revenue comes from Latin America, and it keeps on growing,” said Chairman Manuel Garcia-Duran. Without Latin America, Ezentis would be trapped inside the moribund Spanish market, where it’s losing money.
Seville-based Ezentis is one of hundreds of Spanish companies with heavy exposure to the economies of Latin America. Since 1992, Spanish corporations have spent $117 billion on Latin American deals, according to data compiled by Bloomberg. The acquisitions have been pretty constant, especially over the last 10 years, prompting journalists to dub the phenomenon the Reconquista, in reference to the conquistadors of the 16th century, Bloomberg Businessweek reports in its May 21-27 issue.
Spanish oil company Repsol YPF SA’s (REP) $15.5 billion purchase of Argentina’s YPF was the biggest deal, while Telefonica (TEF) was the most acquisitive company, spending $41 billion on 40 deals. Spanish executives wagered that the region had left behind the instability that saw Venezuela nationalize its oil industry and Chile seize its copper mines in the 1970s.
On the whole, the bet has paid off, even if the Spanish did have to ride out Argentina’s 2001-2002 debt default and devaluation. Telefonica and Banco Santander SA (SAN), Spain’s two biggest companies, generate almost half their sales in Latin America: Madrid-based Telefonica’s first-quarter profits from the region outstripped domestic profits for the first time ever. Spain’s 200 listed companies generate 18 percent of their revenue in Latin America according to data compiled by Bloomberg -- a vital prop to these companies as Spain struggles to grow.
Yet just when Spain’s faltering economy most needs the commercial empire it built among its former colonies, a tide of populism in some of the region’s most resource-rich countries is threatening its assets. In April, Argentine President Cristina Fernandez de Kirchner seized control of YPF from Repsol YPF, claiming that Spanish executives let YPF’s output dwindle by skimping on investment. Repsol denies the allegation.
Within weeks of the YPF expropriation, Bolivian President Evo Morales sent in the army to take over the country’s power- grid operator, a subsidiary of Madrid-based Red Electrica (REE) Corp. SA. “We would not be surprised by more nationalizations,” Marcos Buscaglia, chief Latin America economist at Bank of America Merrill Lynch in New York, wrote in a May 4 research note. They “often come in waves.”
The historic dimension of the relationship, which dates back to a time when New Spain stretched from Cape Horn to what is now the U.S.-Canadian border, casts a shadow over dealings between Spain and its old colonies. “When things go well, things are smoothed over. They forget that you were the old colonial power and you forget how incorrigible they are,” said Jose Ignacio Torreblanca, head of the Madrid office of the European Council on Foreign Relations. “The problem is when things go badly.”
The seizure of YPF is popular among Argentines, who still burn from the condescension they felt from the Spanish over the years. When the Argentine assembly ratified the move, a giant portrait of late President Nestor Kirchner, an ardent interventionist, was unfurled.
The expropriations “couldn’t possibly come at a worse time for Spain,” said David Lea, an analyst at Washington-based Control Risks Group.
Spain’s banks, most of its companies, and its regional governments have been shut out of the bond markets by investors concerned the country won’t be able to restart its economy, pay back its debts, and stick with the euro. Bolivia and Argentina “are taking advantage,” said Rafael Pampillon, head of economic analysis at the Instituto Empresa business school in Madrid. “Maybe they think that since the markets are punishing us unjustly that they can abuse us as well.”
Mexico, Brazil, Chile, Colombia and others have shown no sign of joining the anti-Spanish crusade. Santander, Spain’s biggest lender, has spent $13.7 billion building a bank network that runs from Sao Paulo to Mexico City. With Santander’s Spanish business damaged by the collapse of the property bubble and 8.9 percent of its domestic loans in default, the lender is tapping its networks in Latin America to raise cash, a sign it feels secure in most of its Latin markets.
Santander’s Brazilian division raised $7.1 billion in the country’s biggest initial public offering in 2009 and now plans to sell a portion of its Mexican business. “This is a resource to finance ourselves,” said Marcos Martinez, CEO of the Mexico division.
While Spain’s Latin investments have prospered, its relative economic power has dwindled. Brazil’s economy has almost doubled in real terms in the 20 years through 2011, while Spain’s is contracting.
A decade ago Spanish capital was eagerly sought in the region. Today most Latin countries have abundant foreign exchange reserves and strong banks. Relations with China are often far more important than links with Spain. “Latin America doesn’t need us anymore,” said Torreblanca. “Now they are globalized, the relationship is pretty asymmetric, and in any asymmetric relationship you have risks.”
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