Brink’s Sinks After Venezuela Devaluation Spurs Writedown

Brink’s Co. plunged the most in two years after saying it will write down the value of its Venezuelan assets, showing how last month’s 88 percent currency devaluation is squeezing companies with cash in the country.

Brink’s move may foreshadow similar steps by DirecTV and MercadoLibre Inc., companies that have enough money in Venezuela that switching to the 50 bolivars-per-dollar exchange rate will damp earnings, according to Jonathan Rosenthal, the co-founder of hedge fund Newfoundland Capital Management. He says his fund has been shorting shares of DirecTV and Brink’s, which tumbled 11 percent to $25.34 today in New York.

“Now it will be clear as day to their bankers that this business doesn’t generate nearly the same amount of cash as they thought,” Rosenthal, whose fund is based in the Cayman Islands, said in an e-mailed response to questions.

Brink’s said in a statement yesterday that last year’s earnings from continuing operations would be slashed 35 percent at the new exchange rate and total cash holdings at the end of 2013 would be 32 percent lower. Last month, Venezuelan President Nicolas Maduro allowed companies to start legally trading dollars for the first time in four years to reduce shortages of basic goods caused by currency controls. The parallel market, known as Sicad II, has averaged a rate of 49.9 bolivars per dollar, 88 percent weaker than the official level.

Brink’s also said it will write off “substantially all” of its $120 million of bolivar-denominated assets in Venezuela when it reports first-quarter earnings April 24. The Richmond, Virginia-based company uses armored cars to transport cash and gold. Brink’s made 11 percent of its 2013 sales from Venezuela.

Biggest Holders

“These companies that are booking fictional profits are going to actually start generating losses,” Yaron Reuven, president of Reuven Capital Investments LP, said in an interview. “Those bolivars are useless.”

Moody’s Investors Service said today it put the company’s Baa3 rating, a step above junk, on review for downgrade, saying the adoption of the weaker exchange rate to Venezuelan results “signifies a reduction in the capacity of the more profitable international operations to offset weaker results in developed regions.”

Ed Cunningham, the investor relations director for Brinks, said that the revaluation doesn’t impact the company’s ability to borrow. He declined additional comment beyond the statement.

Brink’s Investors

SouthernSun Asset Management is Brink’s biggest shareholder, with 8.4 percent of stock outstanding. BlackRock Inc. is the second biggest, with a 8.1 percent stake, according to data compiled by Bloomberg.

Brink’s is the first company to adopt Sicad II for first-quarter earnings, according to filings compiled by Bloomberg. While Procter & Gamble Co., Colgate-Palmolive Co. and Telefonica SA have said they would adopt a separate currency system called Sicad I, which was created last year for importers of non-essential products and closed at 10 per dollar yesterday, Brink’s said it didn’t anticipate being able to buy dollars in that market.

The impact for Brink’s may be even deeper than the company’s statement indicated, as earnings based on generally accepted accounting principles may fall as much as 50 percent, according to Rosenthal.

DirecTV’s Cash

DirecTV, the largest U.S. satellite-TV operator, would see cash holdings drop 26 percent while earnings per share could decline 9 percent to 11 percent if its accountants value the bolivar at 50 per dollar, according to Rosenthal.

“You have U.S. corporates where anywhere between 10 to 50 percent of earnings may disappear even though Venezuela’s totally off the radar,” he said. His fund is “figuring out how to monetize this,” which includes betting on declines in DirecTV, he said.

DirecTV, based in El Segundo, California, fell 0.5 percent to $74.93 in New York trading, while Buenos Aires-based MercadoLibre sank 3.2 percent to a 14-month low of $84.09.

Darris Gringeri, a spokesman for DirecTV, didn’t return a voicemail and e-mail seeking comment. Valeria Bazzi, a spokeswoman for MercadoLibre, didn’t return an e-mail, and investor relations manager Diego Escobar didn’t return a phone call or e-mail.

“Venezuela still makes up a meaningful component of the PanAmericana segment,” Bruce Churchill, head of new enterprises at DirecTV, said in a Feb. 20 earnings call. At the time, the company was not speculating on the timing or magnitude of a devaluation, and forecast an earnings per share increase, barring a currency-related revaluation.

Operating Income

Venezuela’s new currency market is the latest attempt by the government to ease a shortage of dollars that has crimped imports, leaving supermarket shelves partially empty and pushing annual inflation to more than 50 percent. Venezuela, which has the world’s biggest oil reserves, has seen its foreign reserves plunge 18 percent in the past year to $21.1 billion.

MercadoLibre, which operates an online-auction site similar to eBay for Latin American markets, would have to cut income from operations by 31 percent if it revalues its Venezuelan assets, according to data compiled by Bloomberg.

“Our Venezuelan operation remains profitable and more importantly self-sustaining,” Pedro Arnt, MercadoLibre’s chief financial officer, said in a Feb. 27 earnings call. “We continue to manage our Venezuelan business for the long run, confident that in a more favorable future, our commitment to that market will offer the right returns.”

Reuven, of Reuven Capital Investments, said he’s betting that shares of the company will decline.

The situation is a “much, much worse scenario than what the company’s portraying,” Reuven said in a telephone interview from New York. “It’s almost become the equivalent of subprime mortgages. You really didn’t know what they were worth until it was already too late.”

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