Sweet Calamity

Quilmes Industrial, the brewer that produces Argentina’s favorite beer, is in remarkably good shape. Carlos Olivieri, the company’s finance director, says it has achieved this by obsessive attention to financial health and to improving the quality of its beer – thanks to an alliance with Heineken, which holds 15% of Quilmes International, its Bermuda-registered operating company. Olivieri says Quilmes can access rock-bottom financing: “Our cost of capital is 7%, a quarter of the national average. There is no crisis at Quilmes. We are a like an island. No other Argentine company has the same track record as we have. We are 110 years old and no one can remember ever posting losses.”

The company’s solid financials and offshore status have won it an investment grade rating from Fitch. Over the years, the company has expanded into Chile, Uruguay, Paraguay and Bolivia. Revenues from these subsidiaries may be vulnerable to fluctuating exchange rates, but their cashflow is substantial enough to pay the Argentine company’s dividends and interest.

Pérez Companc has taken a similar approach. Once a conglomerate, it has focused exclusively on energy. The company produces oil and gas (its oil production costs are among the lowest in the industry) and owns a refinery, a chain of gas stations. Pérez Companc also has power stations and transmission and distribution networks. It has expanded into Brazil, Ecuador and Venezuela. Mario Lagrosa, the CEO, expects to meet his target of doubling the company’s size by 2004. Most of that growth is likely to come from Ecuador and Venezuela. Financing, of course, is critical. “We are working to differentiate ourselves,” says Lagrosa. “In July we issued a $220 million oil-backed bond at 9.3% and not many companies can raise this kind of financing” (see “Pecom Energía Tides Itself Over”).

Techint, a steel, oil and engineering firm based in Buenos Aires, has also expanded overseas, with operations in Italy and Japan as well as throughout Latin America. Siderca, a subsidiary that dominates the Latin American seamless steel pipe business, posted profits up 31% to $35.6 million in the second quarter of this year. A senior executive says, “We are continuing to invest in steel, in oil, in telecoms. But the problem is that the financial markets are closed. All deals have to be done using our own equity. The biggest problem in Argentina is finding long term financing.”

However, there are few success stories like these. In August, Multicanal, Argentina’s second-largest cable company, struggled to avoid defaulting on $164 million in bonds. Multicanal, owned by media giant Clarín, has not posted a profit in five years and owes a total $600 million in bonds. In July, Fargo, a food company owned by Exxel, a local private equity firm, had to restructure a $30 million bank loan. In September, Exxel’s Musimundo chain of music stores filed for bankruptcy owing $207 million.

As a whole, Argentine companies remain too focused on their domestic market. One of the greatest disappointments of the boom years of the early- to mid-1990s was the private sector’s failure to develop sophisticated export-oriented businesses.

Although assets are cheap and many companies are in trouble, there is remarkably little mergers and acquisitions activity in Argentina. M&A volumes in the year to July slumped 75% to $4.20 billion. Uncertainty over the economic crisis is scaring away investors. Financiers say many Argentine companies lack scale, making them unattractive to foreign investors at any price, while local investors seem unwilling or lack financing to buy up their competitors.

Those that have taken the plunge and invested in Argentina are having a rough ride. In 1995, Fiat invested $650 million in a factory in Córdoba. In June, after sales in the country fell by half, Fiat cut output and moved part of its production to Brazil. Belgo Mineira, the Brazilian steel company owned by Arbed of Luxembourg, bought 20% of Acindar, Argentina’s largest steelmaker for $120 million in 2000. The deal was a lifeline for Acindar. Belgo Mineira and the Acevedo family, Acindar’s owners, pumped $46 million into the company. But a $59 million net loss in the first quarter cut equity to $231 million. In May, Belgo Mineira and the Acevedos injected more capital, by subscribing to a $60 million convertible bond. Still, Acindar continues to struggle with $415 million in debt, of which $30 million is due in the short term.

Private equity investors have also suffered. Firms like Hicks, Muse, Tate&Furst, Goldman Sachs, and Exxel have struggled in Argentina. However, Advent International, a private equity firm, has taken a conservative approach. Although it has closed only three deals in Argentina, its investments have all been remarkably successful. Strangely, Advent is not being overwhelmed with proposals. In fact, executives make about 75 to 100 cold calls a year on local companies looking for deals.