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November 11, 2012 1:47 pm
It is a culmination of the so-called “reconquest”, which in the 1990s saw European companies invest heavily in Latin America. What then seemed risky bets are now proving to be an El Dorado.
Ravaged by the eurozone recession, such companies are increasingly using their Latin American operations to repair troubled balance sheets at home. This is especially true for Spanish and Portuguese companies, for which Latin America accounts for 15 per cent and a third of revenues respectively, according to Morgan Stanley.
“The expansion of Spanish companies into Latin America was their first step to become global. Now it has become their way to survive,” said José Antonio Ocampo, a Columbia University economics professor and former Colombian finance minister.
Santander, Spain’s biggest bank, has been among the most opportunistic. It raised $7bn in 2009 when it listed its local subsidiary in Brazil. Last month, it raised a further $4bn when it did the same in Mexico. Both operations helped boost capital levels in Madrid.
Telefónica, Spain’s third-largest company by market capitalisation, is also considering spinning off all or part of its Latin American operations. Worth an estimated €40bn, Madrid may park more of Telefónica’s €57bn debt pile there. BBVA, Spain’s second-biggest bank, said last month that it could consider listing its Mexican operation, Bancomer, which accounted for half of group profits last year.
Such capital releases have thrown a financial lifeline to Europe, and also given a fillip to Latin American capital markets.
“After the privatisations of the 1990s, many local companies were bought by foreigners, and their listings disappeared. Now this trend is reversing, partly thanks to the eurozone crisis,” said Luis Oganes, head of Latin American research at JPMorgan.
The capital extraction is a mirror image of emigration flows. Last year, 20,000 Spaniards emigrated to Latin America to seek their fortune, nearly seven times the amount in 2005. Meanwhile, five of the region’s 10 biggest M&A deals last year were the sale of local assets by retreating Europeans.
Top of the list was Dutch bancassurer ING, which sold its Latin pension operations to Colombian banking group Grupo Sura for $3.6bn. This October, French retailer Carrefour sold its Colombian business for $2.6bn to Chilean retailer Cencosud .
The expansion of Spanish companies into Latin America was their first step to become global. Now it has become their way to survive
- José Antonio Ocampo, former Colombian finance minister
Relative valuations can make such trades appealing. Santander Mexico was valued at two times book value at the listing, while the holding group’s stock trades at less than one.
It can also be cheaper for subsidiaries to fund themselves locally than for the parent company to do so.
“Top-tier Mexican corporate issues are issuing at a substantial discount to top-tier Spanish names,” said Damian Fraser, head of Latin American equities at UBS.
That is even true of sovereigns. On Wednesday, Santander Mexico issued $1bn of 10-year bonds at a yield of 4.2 per cent; by contrast, Spanish government 10-year euro-denominated bonds currently yield 5.8 per cent.
However, repatriating capital from fast-growing emerging markets has its drawbacks and difficulties.
A survey by the IE Business School in Madrid found that, by 2015, most of the 30 largest Spanish companies with operations in Latin America expect revenues from the region to exceed those from home. On Wednesday, Telefónica reported that was already so in its case. Cutting investment now, therefore, jeopardises future profits.
That is why Italian utility Enel says funds raised from plans to consolidate its Latin operations within Chilean subsidiary Enersis, which would then launch an $8bn capital raising, will be used to invest in local operations.
There are also limits on the amount of profits that can be repatriated, especially in Argentina and Venezuela due to currency controls. Elsewhere, there are no signs yet that local regulators are worried about rising levels of repatriated profits – although it has become a talking point among European bank analysts.
BBVA has historically repatriated about 70 per cent of its profits from Mexico, according to analysis by Espírito Santo, with Santander managing about 50 per cent.
However, it is not just in Latin America where troubled companies are looking to raise money: Telefónica this week raised €1.5bn after listing its German unit.
Nor is it only troubled European corporates that are using Latin America as an ATM machine. Cemex, the Mexican cement company that almost bankrupted itself after a string of global acquisitions, is expected to raise $1bn from a listing of its South American assets on the Colombian bourse .
Still, it is mostly an Iberian phenomenon, “driven by hard-pressed Spanish firms who, in earlier expansionary mode, eschewed other parts of the emerging world given their special niche in Latin America,” said David Lubin, head of emerging economics at Citi.
Indeed, larger Spanish companies are now realising the need to be in other fast-growing economies aside from Latin America, although their presence there is serving them well, with the two big banks examining expansion in Asia.
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