Category: Brazil

Banco Bradesco has been named LatinFinance’s Bank of the Year for the 12 month period through July 2008. The Brazilian institution earns this distinguished award at a time when the region’s, and, in fact, the world’s financial institutions seek to regain their footing in a rapidly changing operating environment. This new moment banking is seen rewarding qualities such as conservatism, prudence, and agile strategic decision-making – some of which are inherent in the homebred and sometimes peculiar Bradesco culture. The bank’s strong commitment to internal controls and sustainability, matched by its bold acquisition strategy over the past several are to date virtually unmatched. Monday’s news of Itau’s planned merger with Unibanco will strip Bradesco of its claim as the largest private sector bank by assets and market cap in Brazil. But its rock solid approach to managing its broad, deep deposits base – perhaps the single most reliable and stable funding source of any regional bank – earns Bradesco praise from analysts, sustainability experts, and its clients. Unibanco and Itau are both struggling with derivatives-related problems stemming from products the two banks sold to their clients, says Banif Ixe. Indeed, LatAm’s new private sector monolith Itau Unibanco may find itself taking cues from its now smaller competitor Bradesco on how to manage risk. For the full story on Bradesco, as well as on all of the region’s best banks, go to www.latinfinance.com.

Bradesco is unlikely to recover its number one spot in the rankings of Brazil’s and LatAm’s banks by assets and market cap any time soon, say sellside and ratings agency analysts. While more bank mergers could still happen in the wake of Itau’s purchase of Unibanco, there are few options that would give the tightly run Bradesco a chance to catch up with the merged institution to be. Bradesco is expected to be 25%-30% smaller than Itau Unibanco, according to Goldman Sachs. Medium sized banks like Votorantim, and state-owned entities like Banrisul and Nossa Caixa remain potential targets for buyers like Banco do Brasil, say equity analysts who declined to be named. But those are seen as insufficient to bridge the gap. “There’s nothing else to buy that would make a big difference,” says Moody’s banks analyst Celina Vansetti, noting one has only to run through the list of the country’s top 50 banks and pick out the ones that might be for sale to understand that. “Bradesco remains very solid as it is still among the top four or five banks,” adds Fernando Sotelino, professor at Columbia University and, until 2004, CEO of Unibanco’s wholesale banking unit. “But with Santander-ABN and now Itau-Unibanco, some banks like HSBC start to move farther away from the country’s group of top banks,” he notes.

Itau, Brazil’s second largest private sector bank, is buying its smaller competitor Unibanco for an estimated BRL20bn-BRL26bn. The deal is to be executed through share swaps into a new jointly controlled holding company called IU Participacoes and is the product of a pact between the controlling family shareholders of each bank – the Moreira Salles family on the Unibanco side and the Setubal / Vilela families on the Itau side. No third party advisers were hired for the deal. If approved, the merger creates a bank with assets of BRL575bn, deposits and debentures of BRL235bn, and a loan portfolio of BRL225bn, according to a Goldman Sachs report. That would be between 25%-30% larger, depending on the metric used, than Bradesco, today the region’s largest private sector bank. Itausa will control 66% of the shares of IU Participacoes, while Unibanco will control the remaining 33%, though voting control will be split 50-50. IU’s subsidiary Itau Unibanco Holding, in turn, is 26.0% held by IU, 18.0% held by Itausa, 5.4% held by Bank of America, and 50.6% held by public investors. Economatica estimates the merged entity will be the ninth largest bank in the Americas with $324.0bn in total assets and the sixth largest by market cap after the likes of JPMorgan, BofA and Citi, with $41.3bn. Ixe notes the new bank will be among the 20 largest in the world.

Monsanto has agreed to acquire Aly Participacoes, owner of Brazilian companies CanaVialis and Alellyx, for $290m. Monsanto will pay for the companies using its own cash on hand, says a company spokesman. The seller is Votorantim Novos Negocios and sister company of Votorantim Industrial. CanaVialis is the world’s largest sugarcane breeding company and Alelyx develops biotech traits primarily for sugarcane. Monsanto did not say when it expected to complete the deal, saying only that it would do so as soon as is practical.

Brazilian utility Eletrobras is upgrading its US depository receipt to a full blown NYSE listing, from the OTC ADR program. William Kirst, depositary receipts executive for LatAm at JPMorgan, the company’s ADR sponsor, says the upgrade to the NYSE has been in the works since 2002. “[Eletrobras] had been working on reconciling accounting standards and getting compliant [with NYSE requirements],” he says. By listing on the NYSE, says Kirst, Eletrobras will have exposure to a broader range of investors. He did not disclose the amount of shares to be listed.

Anglo American’s Brazilian subsidiary has launched an offer to acquire the 36.7% stake it doesn’t already own in Anglo Ferrous Brazil, previously known as IronX Mineracao. The offer for the stake is valued at around BRL3.3bn, or BRL28.15 per share, says an Anglo Ferrous spokesman. In August, Anglo American acquired a 63.3% share in Anglo Ferrous for about BRL5.4bn. Shareholders have until December 1 to accept the offer. Shares of the target closed the last trading session at BRL28.27, according to Economatica.

Brazil’s Grupo Votorantim’s continues to amass positions in Peruvian mining assets. On Friday, it purchased 84.54% of the voting shares of Lima-based Minera Atacocha. An executive close to the deal says Votorantim paid about $145m for the shares of the miner, which specializes in zinc, lead, copper, silver and gold. All of the voting shares combined are worth $170m. Atacocha’s total debt is $200m, which, when added to its total equity capital of $310m, gives it an enterprise value of $510m, says the person. Atacocha’s C1 shares have fallen 69% in October and closed at PES2.10. Credit Suisse advised Voto. In August Voto said it had accumulated a roughly 8% stake in Lima-based zinc, iron and copper producer Milpo for just over $200m.

Brazilian miner Vale is cutting its 2009 production of iron ore by 30m tons, its nickel output by 17,000 tons and its pellet generation by 20% to reflect lower global demand for its products. “One [of the] implications [the intensification of financial market stress] is a strong negative impact on the global steel industry, given the importance of steel for industrial production and construction,” says Vale in a statement Friday. The decision is made in response to a number of indications over the past week that demand is falling. Still, it highlights the direct effect of today’s financial and increasingly economic crisis in the developed world on commodities exporters in LatAm going forward. Vale preferred ADRs closed at $11.71 Friday, down from $11.90 in the previous session.

Brazil’s Magnesita Refratarios, the region’s leading refractory materials producer controlled by GP Investments, is two days away from acquiring Germany’s LWB Refractories for $938m, including $542m in assumed debt. A shareholder vote Wednesday, expected to yield a favorable outcome for the buyer, is the last step in a deal that seems to have defied the volatile market conditions that derailed several other LatAm M&A transactions. Magnesita, whose debt carries high-yield ratings of BB/Ba1, agreed in September to pay for LWB with cash and shares. The move garnered support from rating agencies and equity analysts. The cross border deal, set to turn Magnesita into the world’s third biggest refractory company by market share, relies on a sizable financing package for today’s market. “We think the company being created here is backed by very strong sponsors,” says Uziel Fradkin, head of LatAm industrials at JPMorgan, which advised the company and extended a $475m long-term loan for the deal. Control of Magnesita will be shared by private equity firms GP, Gavea and Rhone Capital. Magnesita’s ability to push through with hefty cross border acquisition amidst some of the worst conditions for financing and M&A is notable, given that a number of deals, including Cyrela’s purchase of Agra, VCP’s acquisition of a majority stake in Aracruz, and Autlan’s sale of itself, have fallen apart due in part to market-related factors. CSN’s sale of Namisa to a Japanese group is the only other notable example of a large completed deal, though unlike Magnesita, that process began in April, several months before the most recent downturn. UBS and Merrill Lynch advised LWB.

Brazilian refractory materials producer Magnesita has secured an attractively priced $475m 6-year loan from JPMorgan to acquire Germany’s LWB Refractories, say people close to the deal. Pricing for the loan has not been disclosed, but the cost of the new money is in line with Magnesita’s existing debt, which pays CDI plus 134bp, says a company official. Like the $1bn worth of long term debt on its balance sheet today, the new facility will be swapped into BRL. If the all in cost of the loan does indeed turn out to be equal to the company’s current cost of funds, Magnesita will have scored a substantial coup in the bank market, which has seen deals flexed by up to 150bp to reflect lenders’ higher funding costs. However, sellsiders familiar with the deal say the loan agreement likely includes a clause that will permit the lender to charge what banks are calling a liquidity premium – or a higher margin due to rising funding costs. The loan will eventually have to be syndicated but bankers away from the deal say that in today’s market conditions, they would not think of participating in a facility that pays less than what they fund themselves at. Until that happens, JPMorgan is likely to hold onto the $475m, they speculate. JPMorgan syndications executives decline to comment. Moody’s analyst Richard Sippli says Magnesita’s leverage should peak at around 3.0x with the assumption of LWB’s new debt. “We’re very comfortable with [Magnesita’s] leverage, even with the additional debt,” he says. UBS Pactual, meanwhile, notes the new debt load reduces financial flexibility for further M&A in the near future. As of June 30, Magnesita had cash equivalents of BRL542m.