[A-List] Brazil: globalising capital

[Michael Keaney]

Brazil groups acquire global perspective
By Raymond Colitt
Financial Times: March 9 2004

Last week's merger between AmBev and Interbrew to form the world's largest
brewer highlights the growing internationalisation of leading Brazilian
companies in recent years.

Protected by decades of tariff protection and an insular corporate
mentality, Brazilian companies have traditionally focused on the country's
large internal market. Yet with the opening of the economy in the 1990s and
heavy investment in modernisation, they are becoming big league players in
various industries.

"Brazil has become a world-class competitor in several sectors - steel,
mining, banking, aeronautics, as well as pulp and paper," says Marcelo
Kayath, co-head of Latin American equities with investment bank CSFB in Sâo
Paulo. "It is inevitable there will be more alliances in the future, though
not always involving management control."

Embraer, the world's fourth-largest aircraft manufacturer, has moved into
China and the US and is challenging Canada's Bombardier as leader in the
regional jet market.

Petrobras, South America's largest listed company, has made significant
acquisitions over the past three years throughout the region and controls a
large share of Argentina's oil production and distribution. The oil company
is now eyeing additional operations in Africa and the Middle East.

Companhia Vale do Rio Doce, the world's largest iron ore producer, has also
entered into numerous strategic alliances abroad and at home. In its latest
deal CVRD is looking to invest $1.4bn in an integrated steel plant in
northern Brazil in partnership with Shanghai Baosteel Group, China's biggest
steelmaker.

Gerdau, another large steel company, has acquired important assets in the
US, Canada, and several Latin American countries.

Renewed economic and political stability after the turmoil of the 2002
presidential election has again put Brazilian companies on the international
radar screen as partners and merger candidates. Luiz Inácio Lula da Silva,
the left-wing president, in recent months has repeatedly called on Brazilian
entrepreneurs to be more audacious in their international expansion.

"This operation was only possible because of the credibility Brazil has
obtained with economic, social and institutional stability," says Victorio
de Marchi, AmBev co-chairman.

Merger talks between Companhia Siderurgica Nacional (CSN) and Corus of the
UK, two steel companies, were called off in 2002 amid international market
turmoil and, in part analysts say, on alleged political concerns ahead of
the elections.

One of the driving forces behind Brazilians' search for international
alliances is access to cheaper credit. Even with the fall in country risk
premium over the past 18 months, Brazilian companies continue to pay a
premium of at least 500 basis points over their international peers.

"An investment-grade evaluation allows AmBev access to cheaper lines of
credit on the international capital markets," the Brazilian brewer said
after last week's alliance with Interbrew. With their market value having in
some cases more than doubled over the past year, Brazilian companies have
gained leverage to acquire or swap assets abroad, analysts say.

Yet there are several caveats to a potential wave of mergers and
acquisitions.

"The Brazilian regulatory scenario and the lack of corporate governance are
a huge problem," says Marcelo Mesquita, head of research at investment bank
UBS in Rio de Janeiro.

The the difference in valuation of stakeholder classes is often a huge
disadvantage to minority shareholders, he says. While AmBev's ordinary
shares gained 8 per cent following announcement of the Interbrew deal, its
preferred shares plummeted by 15 per cent. Preferred shares do not have
voting rights and are often short-changed in mergers and acquisitions.

Long delays and the unpredictability of Cade, Brazil's antitrust agency, are
another large hurdle, Mr Mesquita adds.

Cade approved the 1997 merger that gave AmBev a massive market share but
last month vetoed Nestle's acquisition of a domestic chocolate company two
years after the deal was announced. On Monday, the Swiss food giant said it
was studying the sale of some local brand names to competitors in an effort
to win approval.

"It appears authorities are protecting Brazilian companies, not consumers,"
says one analyst with a leading foreign investment firm. "I don't see that
benefiting more acquisitions and mergers."