Snapping Up South America

As multinationals buy in, companies modernize

For the holidays, the multinationals went on a shopping spree in Latin America. On Christmas Eve, New Jersey-based energy group GPU Inc. agreed to buy Argentine electricity distributor Emdersa for $435 million. Days earlier, French supermarket giant Carrefour said it would take over Brazilian department store chain Lojas Americanas. In Chile, Citigroup agreed to buy the country's No. 2 consumer-finance company for $83 million. In just the last two weeks of the year, multinationals announced no fewer than 10 major acquisitions in the region.

They are buying on the cheap: Wild stock market swings have slashed 30% or more off prices. But they are undeterred even by the ongoing risk of devaluation in Brazil and the prospect of economic slowdowns throughout Latin America. That's because the multinationals, often major players in the region, are not just bottom-fishing but are looking to strengthen their stakes in key markets (chart). "We're talking about strategic, long-term buyers," says Bernardo Parnes, managing director of investment banking for Merrill Lynch & Co. in Sao Paulo.

CASHING IN. The deals are drawing chunks of direct investment into the region, in contrast to the dumping of assets by portfolio investors in Latin America and other emerging markets. Announced Latin mergers and acquisitions jumped to $85 billion last year from $73 billion in 1997, although in Asia, M&A activity fell to $78 billion from $80 billion in 1997. Foreign buyers put up 63% of the dollars for the Latin deals, according to Newark (N.J.)-based Securities Data Co., which tracks such activity. Brazil and Argentina accounted for 75% of the region's M&A total.

Wall Street firms are cashing in. New York-based M&A gurus Corrado Varoli of Morgan Stanley Dean Witter and Alberto Verme of Salomon Smith Barney helped put together the region's biggest deal ever, the breakup and auction of Brazilian phone company Telebras for $19 billion last July. The sale helped make Salomon and Morgan Stanley the top M&A advisers in Latin America last year with announced deals worth $25.6 billion and $24.7 billion, respectively. The plunge in asset prices has put buyers firmly in the driver's seat. In a September privatization auction, Belgian utility Tractebel paid $801 million for a 42% controlling stake in Brazilian electric power generator Gerasul. On Dec. 30 it bought an additional 9% for just $79 million, less than half the price per share it paid three months earlier.

In the bidding for strategic assets, multinationals such as GPU have gained an extra edge from the tightening of global credit markets, which is weeding out smaller rivals. "Now, instead of getting 15 potential bidders you get eight," says GPU's chief financial officer, Bruce Levy. "And no one is paying 50% over the second-highest offer."

The prize, despite the economic volatility of emerging markets, is the prospect of reaping better returns on Latin assets than businesses can earn in the U.S. and Western Europe. In Argentina, for example, Levy expects 4% to 6% growth, compared with 1.5% to 2% in Australia and Britain, where GPU has major investments.

HANG ON. For Latin policymakers, one downside to the foreign influx is the rise in unemployment as the new owners slash payrolls. But typically, they improve conditions for employees who remain. The consortium that earlier took over Rio de Janeiro electric utility Light, led by AES Corp. and Houston Industries Inc. of the U.S. with Electricite de France, cut the workforce from 10,000 to 6,600, then introduced the company's first profit-sharing plan in 1997.

The buying spree will almost surely continue through 1999. "A lot of family-owned companies that thought they could hang on now have no access to capital and can't grow," says Walter Stoeppelwerth, head of Latin American research for Robert Fleming Securities Ltd. in Sao Paulo.

Not all foreign companies are willing or able to ride out the Latin business slowdown. On Dec. 23, U.S. sewing machine maker Singer Co., suffering operating losses in Brazil, said it had sold its 47 remaining retail stores in the country to Brazilian investors. But for now, more multinationals are pushing ahead than retreating in Latin America. The result is a business landscape that looks increasingly like the rest of the world's.

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