Look Who's Buying Up Brazil's Crown Jewels

Family conglomerates are out to conquer new turf

On May 6 at 5:50 p.m., the first champagne cork popped in the 17th-floor offices of Rio de Janeiro's Banco Fonte Cindam, brokers for Brazilian steelmaker Companhia SiderPound rgica Nacional (CSN). A few minutes earlier, the auctioneer's hammer had fallen in Rio's stock exchange on Latin America's biggest privatization: the $3.1 billion sale of a controlling 41.7% of iron mining giant Companhia Vale do Rio Doce (CVRD) to investors led by CSN.

For CSN Chairman Benjamin Steinbruch, who followed the auction on a computer screen at Cindam, the toasts also marked another triumph: the swift rise of Steinbruch's family business, Vicunha, which owns 14% of CSN. In just four years, Vicunha has grown from a traditional textile maker to the ranks of Brazil's giant family-owned conglomerates, with a net worth of around $1.9 billion in 1996 (table). In the high-stakes CVRD bidding, "we could have gone higher," an elated Steinbruch says. The loser: Brazil's biggest conglomerate, Votorantim, and its partner, mining heavyweight Anglo-American Corp. of South Africa.

BIG CHANCE. Vicunha is a prime example of how Brazil's most agile conglomerates are changing their strategies to survive and prosper in an increasingly open market. So Paulo-based Vicunha, jointly owned by the Steinbruch and Rabinovich families, had continued to focus on textiles after it was formed in 1966 by a merger of the families' textile businesses. Like other groups, it piled up profits during Brazil's decades as a closed economy, shielded from international competition. But the sell-off of state assets, which began in the early 1990s and is gathering momentum, is offering a once-in-a-lifetime chance for family conglomerates to expand into previously closed areas. "Brazil's big groups are getting stronger by taking advantage of the changing economic model," says economist Mauro Schneider at ING Barings in So Paulo.

None is building strength as quickly as Vicunha. In 1993, the company seized the opportunity to diversify by buying 9.2% of CSN, South America's biggest steelmaker, when it was privatized. Two years later, it became the biggest among CSN's shareholders, which range from banks to pension funds. With Steinbruch, 43, as chairman, CSN earned $190 million in 1996 and is expected to earn $244 million this year, Salomon Brothers Inc. estimates, up from $30 million in 1993. And for Vicunha, CSN has become a vehicle for participating indirectly in other privatized companies in which the steelmaker has invested, from railroads to an electric utility. Vicunha revenues, including its pro-rated shares in such businesses, jumped from $1 billion in 1992 to around $2 billion last year.

Steinbruch, an intense but informal executive who prefers jeans to suits and ties, was the force within the family who convinced other members that Vicunha had to diversify. At CSN, he led the sluggish company's transformation into a profit-driven money maker.

What the CVRD sale showed, though, is that Brazil's market opening is also forcing the family conglomerates to transform themselves. The once inward-looking groups have little choice now but to look outward for financing, technology, and investor allies.

MORE CLOUT. Facing the formidable combination of Votorantim and Anglo-American, Steinbruch enlisted Charlotte (N.C.)-based NationsBank Corp. as a key partner for the CVRD auction. The bank led a group that bought a 5% stake, and more important, offered up to $1.2 billion in loans. "As the multinationals come in, there is a new level of competition," says Corrado Varoli, who heads Latin American mergers and acquisitions for Morgan Stanley & Co. in New York. But by joining forces with them, the smart players in Brazil "can turn that competition into an opportunity," Varoli says.

One result of the privatizations is to increase the clout wielded by the conglomerates in key industries. Some analysts believe that Brazil's antitrust agency will force CSN to sell some of its holdings in other steelmakers. Even so, Brazil's economy is too diverse to be dominated by just a handful of players. As long as the pie keeps growing, Vicunha and other hungry groups are likely to bite off as much as they can.

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