Double or quits

Too much confronting and voting, too little governing

ON TAKING office as president last year, Evo Morales, a radical socialist of Andean Indian descent, promised to “refound” Bolivia on more democratic lines by means of a new constitution. But far from offering Bolivia a new start, the constitutional rewrite threatens to prolong a political confrontation that has seen two presidents overthrown since 2003.

At a marathon 16-hour session held at a university in the highland city of Oruro on December 9th, a rump of the constituent assembly (164 of its 255 members, most supporters of Mr Morales) rubber-stamped all of the 411 clauses of the new charter (bar one on landholding). But the opposition boycotted the session; it claims the document is illegal, since it was not approved by the required two-thirds majority of the assembly. Legal or not, the government's plan is to submit the document to a referendum next year.

Mr Morales's followers say the new constitution will give more rights to indigenous Bolivians. It recognises no fewer than 37 official languages and grants autonomy to indigenous communities. They call the opposition a racist “oligarchy”.

Only a score of articles are controversial (though others may prove to be expensive). Opponents worry in particular about the weakening of property rights and a greater role for the state in the economy; about giving traditional, community justice equal status to the formal courts; and about judges being popularly elected rather than being appointed by a two-thirds majority of Congress as at present. They also want more explicit guarantees of regional autonomy.

Narrow though the differences seem, the constitution is only part of a broader political battle between two Bolivias: the poorer, mainly Indian western highlands still revere Mr Morales, while the opposition is led by the regional prefects of the more prosperous eastern departments. They accuse the president of stirring up racial conflict in a country where many people have been happy enough to define themselves as mestizo (of mixed race).

The opposition has had the upper hand for much of the past few months. Through political miscalculation, Mr Morales has driven the departments of Cochabamba and Chuquisaca into the opposition camp; even the prefect of La Paz was critical of the way the constitution was approved. Five regional governments plan unilaterally to declare autonomy on December 15th.

The opposition also objects to the government's efforts to remove three of the five judges on the Constitutional Tribunal, and to Mr Morales's reliance on Venezuela's Hugo Chávez, who has provided the government with cash and advisers. On December 6th a mob stoned a Venezuelan aircraft which landed at Riberalta, in the northern jungle.

But some of the prefects, too, seem to be overplaying their hand, by threatening separatism. “The government has to choose between autonomous departments within the nation, or new countries for neighbours,” says Mario Cossío, the prefect of Tarija. Along with his colleagues from Santa Cruz, Beni and Cochabamba, Mr Cossío went to Washington, DC, earlier this month to press the Organisation of American States to intervene. This has annoyed the armed forces.

Mr Morales has responded by challenging the opposition to a sort of duel. He is proposing recall referendums for himself and the prefects. One way or another, Bolivians may have a lot of voting to do in 2008. That may be an effort to distract attention from everyday problems, such as fuel shortages (caused by mismanagement by the state oil company), rising inflation and a lack of jobs. Mr Morales enjoyed widespread sympathy at home and abroad when he took office. He risks squandering much of that by seeking confrontation rather than the political consensus he needs to improve the lot of poorer Bolivians.

Bargain Hunting in a Buyer's Market

Latin American investors are buying up companies left behind by retreating multinationals. More local investors are getting ready to hit the acquisition trail soon.

Carlos Slim, Mexico's wealthiest and shrewdest businessman, is a past master at the waiting game. Years ago, as telecom giants like Verizon, BellSouth and Telecom Italia spent billions on Latin American cellphone networks, Slim quietly decided to bide his time. He expected that sooner or later some of these businesses would wind up on the auction block at tempting prices. He set up América Móvil as a vehicle to buy up cellphone operations as they became available and weld them into a regional wireless company. Carlos García Moreno, chief financial officer of América Móvil, says, "América Móvil was born at the end of 2000 and it was always understood that the company was meant to be a regional player and that would entail going ahead with acquisitions." América Móvil has since spent $2.5 billion to buy 14 companies in the Americas, mainly from multinationals retreating from the region.

Slim's latest coup came in August with the $625 million acquisition of Brazilian wireless company BCP Telecomunicações from BellSouth and São Paulo's Banco Safra. Dominic Rossi, head of Latin America at Threadneedle, a British asset management company, says the deal "had Carlos Slim written all over it. He was never going to overpay. He looked at the license auctions several years ago and took the view not to pay those prices." The BellSouth and Banco Safra alliance ended in tears as they fought over how to restructure overleveraged BCP's liabilities. In the end, they sold BCP to América Móvil for a fraction of the money they had invested in the company.

Carlos Slim: Cleaning up after the party.

Slim is far from alone as he rummages around in Latin America's bargain basement for castoffs left by the multinationals. Latin Americans and a handful of astute private equity investors are also hunting for deals. Indeed, mergers and acquisitions in the region these days are being driven by Latin American investors, not multinational companies as was the case during the go-go 1990s. Multinationals were once happy to pay good prices for local companies because they thought the region would keep growing. They expected incomes to go on rising and currencies to remain stable. But many of them started pulling out in the late 1990s when financial crises and economic troubles cut growth. The foreigners are still in retreat. Nicolás Aguzín, head of Latin American M&A at JP Morgan, adds that the 2002 Sarbanes-Oxley corporate governance act has further cut the appetite of US companies for acquiring Latin American competitors. "CEOs of US and European companies are increasingly scrutinized by investors and they now have to be more knowledgeable about the markets where they decide to invest. Strategic investors have been substantially more rigorous when analyzing investments in Latin America," he says.

Largely Local
All this explains why eight of the top 10 acquirers of Latin American companies this year are locals, with Mexico and Brazil in the lead (see table below). A consequence of this is that while the actual number of transactions remains more or less unchanged over last year, the average value of these deals has dropped sharply. Put simply, Latin Americans are not deterred by economic upheaval but generally avoid overpaying, both because they have a clearer idea of the value of the companies they are buying and because few of them have easy access to cheap financing.

Stephen Cunningham, head of Latin American investment banking at Morgan Stanley, says, "It is a clear signal that Latin Americans, who have the history and knowledge of the region and of the assets they are investing in, feel comfortable with the economic valuations and political environment. It is an appropriate time for them to take advantage of the reduced valuations. They are consistently much better than international groups at gauging valuations." Rick Rodríguez, president of US-based private equity firm Southern Cross, says, "Today, our biggest competition is local. The internationals usually come at the wrong time and leave at the wrong time. Fortunes in Latin America are made in times like this."

Research firm Dealogic counted 360 announced acquisition deals in the year through mid-October, compared with 4 for the whole of 2002. However, this year's deal volume totaled $22.06 billion, compared with $40.63 billion for the whole of 2002. This is a far cry from 2000, when Latin America saw a record $121 billion in M&A volumes and 760 deals.

The fact that stingy Latin Americans have replaced multinationals as the main bidders for local companies has slowed deal flow. Says Aguzín, "Transactions overall are more difficult to complete. There is less competition in auction situations and transactions are 'negotiated' more than they were in the past. Since we have more Latin-to-Latin transactions, the financing aspects have become an increasingly important aspect of M&A transactions." Even in Argentina, where there are plenty of distressed companies looking for a buyer, it can still take a long time to close deals.

A select few Latin American companies are using this buyer's market to build up regional franchises, such as Slim's América Móvil. It began building its Latin American platform at the beginning of 2001, when it marched into markets from Argentina to Guatemala. Paul Knight, co-head of Latin American investment banking at UBS, says América Móvil and a few other Latin American companies trying to build regional platforms are doing so to reduce costs and achieve economies of scale. In the space of a few years, Colombia-based Bavaria has grown into the region's second-biggest brewer, with operations in Peru, Ecuador and Panama. AmBev, the Brazilian beer giant, controls the Argentine market after buying into dominant local brewer Quilmes. The Quilmes deal brought AmBev exposure to markets in Bolivia, Uruguay and Paraguay. Petrobras, the Brazilian national oil company, took over Argentine oil company Perez Companc in 2002 and with it acquired assets throughout Latin America. Petrobras agreed to pay $1.03 billion for Perez Companc after its market capitalization crashed to $1.09 billion from $3.68 billion at the end of 2001. The Brazilian company is now well on its way to fulfilling its ambition of becoming a regional major. In May, Mexican beverage company Femsa closed its acquisition of Panama-based Coca-Cola bottler Panamco. Femsa, now the world's second-largest Coke bottler, paid $3.6 billion in cash and assumed debt for Panamco. Its region-wide franchise includes Buenos Aires and São Paulo, Brazil's wealthiest and most populous state.

Knight adds that, "Building a regional platform can be value-enhancing. The next phase will be monetizing that value in the equity markets or by selling to a strategic buyer." Once growth picks up and Latin America begins to look more attractive to multinationals - especially those in industries that are consolidating at global level - the owners of the region's leading companies and strongest brands may indeed be ready to sell some, or even all, of their equity to outsiders.

Country of the Future
Brazil remains the heart of Latin America's M&A market, as it has for years. So far this year, M&A deals involving Brazilian buyers totaled $6.62 billion, or one-third of the total for Latin America, according to Dealogic. Many Brazilian industries are still relatively fragmented, particularly finance, telecommunications and retailing. Banco Bradesco, Brazil's second-largest bank by assets, spent $1.36 billion on acquisitions this year. In January, it bought Spanish bank BBVA's Brazilian bank for $789 million, paying $593.3 million in cash and $195.8 million in shares. Bradesco later took over JP Morgan's asset management division for an undisclosed sum.

Outsiders could soon start moving into Brazil again. The country has a large, underdeveloped consumer market that invariably grows rapidly when the economy stabilizes. Inflation is easing, the currency has strengthened and interest rates are on their way down. The economy has stagnated this year, but economists expect it to expand by 3%-3.5% in 2004. The spread of Brazilian sovereign bonds over US Treasurys, the standard measure of risk, has dropped 57% since January to 600 basis points in October.

Easier Access
This more benign environment is enabling Brazilian companies to raise financing on more affordable terms, which should both improve their finances and enable them to begin replenishing their war chests. Corporate bonds are in huge demand with investors. For instance, mining giant CVRD issued a plain vanilla bond at the beginning of August that priced 333 basis points inside Brazil's 10-year bond. Deutsche Bank and Morgan Stanley led the issue. Roberto Castello Branco, CVRD's director of investor relations, says the bond was a watershed for the company. "The debt market is telling us that CVRD risk has decoupled from the Brazilian risk."

Brazilian paper pulp producer Aracruz Celulose issued a $500 million plain vanilla bond in September at its lowest rate ever. A $500 million, 10-year bond with political risk insurance from AmBev, the beverage company, was oversubscribed four times. Citigroup led that offering. Brazilian bank Unibanco completed a follow-on equity offering at the end of September, raising $218 million to similar acclaim. The ease with which big Brazilian issuers can tap the markets is good news for mergers and acquisitions says Pedro Chomnalez, head of Latin America mergers and acquisitions for CSFB. "The availability of financing will be a key driver for our market," says Chomnalez, who sees this is a sign that M&A activity will pick up strongly next year.

However, most of the action is still focused on domestic markets, with local companies buying the operations of departing multinationals rather than venturing abroad. And few companies based in investment grade countries such as Chile and Mexico, with cheaper access to financing, are being particularly expansive outside their home markets. América Móvil is the most acquisitive cross-border raider, buying two companies in Brazil this year - BCP and wireless company BSE - for $830 million. Indeed, M&A activity as a whole in Mexico remains subdued. Dealogic says there were 28 M&A deals in Mexico through October worth $2.55 billion. In Chile, there were 22 transactions worth an aggregate $1.95 billion.

The growing involvement of private equity investors, although timid in comparison with the shopping frenzies of the 1990s, is another welcome portent. Morgan Stanley's Cunningham says, "Private equity funds have raised a lot of funds globally and a number are on the road raising cash for Latin American investments right now, in Mexico and Brazil, in particular. There are also turnaround situations in Argentina and that will be a driver." These investors are far cannier than those who rushed into Latin America at the top of the market five years ago. They can spot opportunities and drive as hard a bargain as Carlos Slim or any other veteran Latin American investor.

Investors are beginning to look for companies that offer some form of regional integration. Southern Cross and Pegasus, two funds that are active in Argentina, prefer companies with products, business methods or technologies that can be applied elsewhere in the region.

Plenty of Interest
And even if there are few multinationals with an appetite for Latin American acquisitions - multinationals are traditional buyers of companies from private equity investors - local equity investors are certainly interested. At the end of September, Southern Cross sold 20% of its wholly-owned Chilean retailer La Polar in an initial public offering for $30 million. Local investors placed $210 million in orders, seven times the issue amount. La Polar plans to use the funds to expand its franchise in Peru and Argentina.

Increasingly, Latin America's bigger companies will have to think on a regional scale. They need to gain economies of scale and establish substantial, diversified revenue streams if they are to hold their own in industries that are consolidating rapidly. Latin America's bosses have traditionally opted for organic growth, but this is no longer enough - only acquisitions ensure rapid, region-wide expansion. The timing for these deals could scarcely be better. With the multinationals still out of the game, with financial markets opening up and economies showing signs of recovery, next year could at long last prove to be a banner year for mergers and acquisitions. LF