Multilatinas: the new pretenders

A new generation of firms in the Latin Americas that are breaking free from old traditions.

A new wave of multilatina firms is emerging, and it is shaking up old, complacent ideas about Latin America’s multinationals. Traditionally, multilatinas were Mexican or Brazilian, former state-owned enterprises (SOEs), which enjoyed deep relationships with governments and were concentrated in industries swaddled in protectionism after privatisation. The handsome profits made from domestic monopoly positions allowed them to go on the acquisition trail abroad, knowing that profits at home were protected. Not surprisingly, those that were well run have thrived.

Some of these traditional multilatinas, particularly in Mexico, are now facing new challenges. The country is belatedly waking up to just how damaging the lack of anti-trust policies has been – Telmex has more than 90% of the fixed-line market – just as foreigners become more interested in the fast-growing region again. Life may become tougher as anti-trust regulators stop barking and start biting. And for firms that are still under government ownership, as is the case with Brazil’s Vale, acquisitions overseas are likely to prove sticky with other national governments: the worries over sovereign wealth funds and their motives illustrates just how uncomfortable life can become for acquisitive SOEs.

At the same time, a new breed of multilatinas is emerging, from steel company Gerdau to meatpacker JBS Friboi. What they share is excellent, tight management, good cost controls and the flexibility that comes from thriving in high-risk markets. “These firms have become increasingly competent and efficient as they have been exposed to difficult market conditions over the past 20 years,” says Andrea Goldstein, senior economist at the Organisation for Economic Co-operation and Development (OECD), who has written a book on emerging market multinationals. Moreover, they have been spending to catch up in areas such as research and development and on developing brands, he says.

Critically, what has changed for them is that they are now on a much more level playing field with developed market companies in terms of access to funding. That said, even now firms from small markets are still hamstrung by a lack of cheap financing. Colombian and Argentine companies, for example, are severely constrained by political instability and that makes it doubly impressive that firms such as Bancolombia and Arcor have stood their ground through their countries’ crises and emerged stronger.

It is unclear just how many firms will thrive in the new global environment and how many new ones will emerge. “It is difficult to analyse data because these operations are so new. You just don’t have the time span,” laments Mr Goldstein. What is for sure is that multilatinas are going to look more diverse and be more persistent competition in mergers and acquisitions and carry off prizes that were once the exclusive preserve of blue-chip, developed market companies.

TRADITIONAL

Cemex
(Mexico, building materials)
www.cemex.com

Monterrey-based Cemex made net profits of $2.4bn last year and earnings before interest, taxes, depreciation and amorisation (EBIDTA) grew 11% to $4.6bn. Its CEO is Lorenzo Zambrano.

Cemex grew from humble beginnings in 1906, rapidly leading the consolidation of the Mexican cement industry. By 1992, it was buying abroad, starting in Spain and on to other Latin countries and the US. It is now the world’s largest building materials supplier and third largest cement producer.

Cemex bought Australian building materials company Rinker for $14.2bn last year. The purchase of Rinker represents the biggest takeover of a company in the history of the sector and the largest foreign purchase ever by a Mexican company. The move followed on from the extremely successful $4.1bn acquisition of the UK’s RMC in 2005.

Pros: The management team is strong with a proven ability to operate with great efficiency and generate consistently high margins. Cemex is rapidly diversifying with recent acquisitions in the UK and Australia.

Cons: Much greater current weakness than expected in core markets (US and domestic), which still account for 60% of EBITDA. Cemex remains relatively unknown as a brand name overseas.

Telmex/América Móvil
(Mexico, telecommunications)
www.telmex.com.mx and www.americamovil.com

Mexico City-based Telmex reported EBITDA of $5.8bn in 2007, a drop of 4.1% since the previous year, while América Móvil reported EBITDA of $11.8bn in the same period, up 41.6%. The controlling shareholder of both is Carlos Slim, the world’s richest man.

From roots as a privatised monopoly, Telmex and later América Móvil (which was spun off in 2001 partly to avoid anti-trust scrutiny) have built a dominant presence in their home market: Telmex has more than a 90% share while América Móvil has more than 70% in their respective markets. They have grown throughout Latin America, even penetrating the US, where América Móvil has built up a 28% market share of the prepaid market. Telmex is preparing to spin off international operations in a new company, Telmex Internacional, which will be listed on the US and Mexican markets. The spin-off should include fixed-line operators, television cable companies and internet service providers in Argentina, Brazil, Chile, Colombia, Ecuador and Peru.

Pros: Mr Slim has proven to be a reliable and massive money producer in a growth industry in a protected market, particularly in the cell phone segment. Both are well known names throughout the region (through different brands) and both have kept costs under tight control.

Cons: There is growing pressure from anti-trust authorities and if plans to allow foreigners to own more than 49% of fixed-line operators are enacted in Mexico, Telmex customer charges will tumble. The economies of Mexico and the US are performing poorly and Telmex has warned that 2008 will be a tough year.

Vale
(Brazil, mining)
www.vale.com

Rio de Janeiro-based Vale made pre-tax profits of $20.3bn in 2006. Valepar, which is owned by government entities and pension funds, holds 35.2%, and there is a free float of 61.2%. Its CEO is Roger Agnelli.

Vale, privatised in 1997, has built itself into a world leader in iron ore and nickel and is growing fast in other non-ferrous metals. It grew through consolidation in Brazil and, until recently, relatively small acquisitions overseas. The $19bn take-over of Canadian mining concern Inco in 2006 catapulted Vale into second place in the world mining league tables. Vale is now seeking a financing package for the possible take-over of English/ Swiss miner Xstrata in a deal worth $90bn.

Pros: The huge Carajás mine has proven reserves of iron ore estimated at about 100 years. The firm has an extensive logistics infrastructure, which enables it to avoid bottlenecks. Deep experience in emerging markets and a diversified customer base globally is enabling Vale to expand overseas. Recent success at paying for and absorbing other large mining firms lends further credibility.

Cons: A cumbersome ownership structure and government golden share could prove a hindrance for Vale as the mining sector rapidly consolidates. Vale faces government interference and political appointees and there is even a distant possibility of re-nationalisation. The firm is engaged in a bitter row with CSN over mining assets, particularly the huge Casa de Pedra, which is being dragged through the courts.

Televisa
(Mexico, media)
www.televisa.com

Mexico City-headquartered Televisa had net income of $799m in 2006 and $243.9m in the third quarter of 2007. The CEO is Emilio Azcárraga Jean.

Televisa is the largest media company catering to Spanish speakers in the world. Through a raft of subsidiaries, it is involved in areas including television production, broadcasting and distribution; cable; publishing; radio; and an internet portal. It accounts for 60% of the advertising market in Mexico. Recently, Televisa, which had a minority stake and long-standing relationship with Univision, the Spanish-language broadcaster in the US, was thwarted in its attempt to buy the firm in an auction.

Pros: Televisa and rival TV Azteca dominate the Mexican airwaves, with more than 95% of the viewing audience. Legislation passed in 2006 gives incumbent broadcasters a helping hand in digital broadcasting.

Cons: The loss of the relationship with Univision is a serious blow to Televisa. The firm may now seek an alliance with NBC’s Telemundo unit, Paxson Communications, or McGraw Hill. In its home market, Televisa is coming under pressure from competitors including giant GE, which has a joint venture that is looking to broadcast in Mexico.

NEW WAVE

Gerdau
(Brazil, steel)
www.gerdau.com.br

Porto Alegre-based Gerdau reported net income of R$3.5bn ($1.9bn) in 2006 and net profit reached R$3.4bn in the first nine months of 2007, a 7.6% year-on-year improvement. Its CEO is André Gerdau Johannpeter.

Born as a nail factory, Gerdau now has operations in several Latin countries as well as Canada and the US. It kicked off international expansion by buying a 40% stake in Spain’s Sidenor.

In January, Gerdau announced a definitive agreement to buy Quanex Corporation, the second largest producer of specialty steel in the US, for $1.5bn. Last year, the firm bought Chaparral Steel for $4.2bn.

Pros: Gerdau is at the forefront of the steel consolidation and has proven highly nimble and successful in raising finance. Its acquisitions have fitted in well with the firm’s existing business.

Cons: The firm is not well diversified, with concentrations in Brazil and North America. It has paid what some consider a high price for acquisitions given that some weakness in commodities and their derivative products is widely expected because of the deteriorating economic outlook.

JBS Friboi
(Brazil, meatpacking)
www.jbs.com.br

São Paulo-headquartered Grupo JBS Friboi reported $1.8bn in 2006 revenues, a figure that should rise to about $13bn this year with its acquisitions. The CEO is Joesley Mendonça Batista.

JBS Friboi was founded in 1953 in rural Goiás state in central Brazil. It only started making foreign acquisitions in 2001, which were initially confined to Argentina but it is now the largest meat producer and exporter in Latin America. Friboi bought meatpacking business Swift of the US for $1.46bn last year, giving it production and distribution operations in Brazil, Argentina, the US and Australia. This followed the 2005 purchase of Argentina’s Swift Armour for $200m.

Pros: JBS has grown out of the giant Brazilian beef industry, which has the cheapest costs in the world and plenty of room for growth thanks to under-utilised pasture land. The industry is growing rapidly as beef consumption rises worldwide and acquisitions give JBS access to the US, the world’s top consumer of beef, and Asian markets such as Japan, which ban imports from Brazil.

Cons: The firm has a short track record, and poor practices abound in its home market. The EU has restricted imports from Brazil on grounds of quality control. Further concerns for exports centre on the encroachment of cattle herds into the Amazon. The fiercely competitive market in the US means Swift consistently failed to make profits there.

Fomento Económico Mexicano, SA
(Mexico, brewer and soft drinks)
www.femsa.com/en

Headquartered in Monterrey, Femsa reported total operating income in 2006 of $1.6bn. Its CEO is Carlos Salazar.

FEMSA was founded in 1988 after a debt restructuring of its predecessor VISA and since that low point has become the largest beverage company in Mexico and Latin America. The company is perhaps best known as the bottler for Coca-Cola and is the second largest Coke bottler in the world, operating in nine counties. Last December, Bill Gates announced he would invest $390m in FEMSA through Cascade Investments, providing a big boost to the firm.

Pros: FEMSA has enjoyed phenomenal growth in the past 10 years and its deep relationship with Coca-Cola gives it instant name recognition and a halo that few other Latin companies have achieved. It has accelerated an already successful expansion plan in other Latin countries.

Cons: In line with other Mexican companies, there is increasing scrutiny of FEMSA’s dominant position. FEMSA’s bid with Coca-Cola to buy juice company Jugos del Valle was turned down last year and a division of Coca-Cola has been investigated for monopolistic practices in Mexico.

TOUGH MARKET FIRMS

Bancolombia
(Banking, Colombia)
www.grupobancolombia.com

Medellín-headquartered Bancolombia reported net income of $376.5m in 2006. Its CEO is Jorge Londoño Saldarriaga.

As the largest Colombian retail bank and leading investment bank, it was formed through the merger of three banks and has close to 700 domestic branches across the country with a client base of more than four million.

Bancolombia announced it would acquire El Salvador’s Banco Agrícola in late 2006. The $900m purchase gave it nearly one-third of El Salvador’s deposit base. Last May, Bancolombia issued the first ever international subordinated bond from a Colombian financial institution to help pay for the acquisition.

Pros: The company is a highly sophisticated player in the retail banking sector and well versed in capital markets. The Colombian economy is faring better under president Álvaro Uribe and with an improving security picture, it remains the fourth largest bank in Latin America.

Cons: Colombia’s economy is closely tied to that of the US and the stock markets have been sagging of late. Bancolombia has limited scope for further growth in its home market.

Arcor
(Argentina, confectionery)
www.arcor.com.ar

Arroyito-based Arcor remains a privately owned company and is not listed. Its annual turnover is $1.5bn and it has 41 industrial plants in Latin America. Arcor is the world’s largest producer of sugar confectionary and is its leading exporter in Argentina, Brazil, Chile and Peru, with exports going to more than 120 countries.

A large investor in technology, it is one of the few large Argentine companies that did not go bankrupt or sell out to foreigners during the 2001-02 financial turmoil. The firm set up a strategic association with the French giant Danone in 2005, which will enable it to unify its business of cookies and cereal bars in the Mercosur region.

ONE TO WATCH

GP Investimentos
(Brazil, private equity)
www.gp.com.br

Headquartered in São Paulo, GP Investimentos announced net income last year of $185.3m. Its CEO is Antonio Bonchristiano.

GP Investimentos has emerged as a private equity giant in Brazil and is now stretching its wings. It launched its first private equity fund in 1994 with $500m. By 2007, it was on its fourth fund and was able to get first closing commitments of $1.03bn. In December, GP announced it would open a Mexican office to be headed by Marcio Trigueiro, one of it seven partners. Money will be allocated from the firm’s $1.3bn fund, which has a mandate to invest outside Brazil.

Pros: GP has the local market knowledge and clout to conclude deals quickly and has proven phenomenally successful, particularly in the construction field. It invested in construction company Gafisa in 1997 and has seen revenues grow 19-fold since then.

Cons: GP is seeing rapidly growing competition in its home market with the arrival of North American players who have unrivalled access to developed market investors. Public equity market downturns complicate exit strategies from existing investments.

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