It would be fair to say that Latin Americans don’t always receive international corporations with open arms. Unlike Britain, where people seem quite happy to let foreigners take charge of everything – from nuclear power stations to the central bank – in Latin America, foreign firms have to tread more carefully.
I saw firsthand the distrust of foreign involvement in Mexico City in spring 2008. Walking through the city centre, I happened upon a heaving mass of angry protestors. There were hundreds of thousands of people crammed into the main square. It was an unforgettable sight. Never one to miss a good protest I joined the crowds and asked fellow marchers what it was about. The answer? “Los gringos quieren el petróleo” – “the gringos want the oil”. The people were marching in protest of a government plan to open up oil reserves to international companies. And I haven’t forgotten the raw anger of the people I met that day. As a writer for an American commodity magazine, I felt a bit of a fraud.
In many cases the distrust is justified. When huge swathes of the Latin American economy were opened up to foreign investors in the late 80s and early 90s many locals felt powerless. One reason was that the privatisation was borne out of weakness. Many countries were mired in debt and international help came on the condition that Latin America would sell a chunk of its state industries. To make matters worse, when these key industries were put on sale most local businesses didn’t stand a chance at the auction.
Some labelled the incoming firms the ‘new conquistadores’ – modern-day European firms carrying on where colonial armies had left off. But in the last few years the corporate colonialism has started to falter. Increasingly large local firms, known as ‘multilatinas’, are fighting back – often buying out their European rivals.
I think this ‘reconquista’ throws up some interesting opportunities for investors. If you side with the right local firms you could stand to profit.
Who are the multilatinas and what are they up to?
In 1999 less than half of Latin America’s top 500 firms were local. Now more than three quarters are. Moreover the trend is accelerating. In the last year a host of Western firms have sold up their Latin American businesses to local rivals.
What’s driving that change? One factor is that European firms are losing money at home. As a result, some are using their Latin American operations as ATMs, taking money out of the region to shore up their struggling European businesses. But this leaves them less able to compete with their resurgent Latin American competition. They either lose market share gradually or cut their losses and sell up.
There are also signs that local investors and regulators increasingly feel more confident in taking on the once-vaunted European firms. For example, when the Spanish electricity generator Endesa tried to raise $8bn of capital from its Chilean subsidiary Enersis, it sparked a revolt among Chilean minority shareholders. The Chileans suspected the Spanish firm, which itself is owned by an indebted Italian utility, was just trying to get cash out of the country to use in Europe. This week Endesa backed down and agreed to cut it to under $6bn.
The other element to the story is the rise of Latin America’s smaller economies. Traditionally most multilatinas came from the region’s heavyweights – Mexico, Brazil and Argentina. What’s different now is that we are seeing firms from some of the smaller countries asserting themselves.
Don’t invest in the ‘old guard’
Most British investors have probably heard of the most famous multilatinas. But while they may seem an obvious bet, they’re not always a good investment.
Arguably the most famous of them all is Mexican cement producer, Cemex. For the last few decades Cemex has been buying up international rivals and competing with the best multinationals from around the world. What set Cemex apart from its competition was its use of IT. When most people were treating cement supply as a simple business, Cemex invested heavily in a sophisticated IT and logistics system. It also went on an international buying spree. As a result it’s now one of the largest cement firms in the world, with sales in more than 100 countries.
If you’ve been reading The New World then you’ll know that I think cement producers are a good way to play Latin America’s building boom. But unfortunately Cemex is now ‘too international’ for our purposes. Most of its sales now come from outside the region. Indeed just last month it spun off some of its Latin American businesses as a new firm, Cemex Latam Holdings. Unfortunately it is only listed in Colombia, so it’s out of bounds for us.
Next up you have Brazilian resource companies like iron-ore producer Vale, and Petrobras the oil major. Like Cemex, they are among the world’s leading firms in their field. And, like Cemex, they’ve combined innovation with brute size to get where they are today.
A few years ago I interviewed Eliezer Batista, the man who turned Vale into a truly international firm. I was trying to use the interview as a way to meet his son Eike, the richest man in Brazil. But Eliezer is a canny old businessman and even at the ripe old age of 80, he gave me the runaround.
Eliezer told me how he built up Vale. Back in the 1960s, when he became president of the firm, there was little local demand for Vale’s iron ore. The most attractive market was Japan’s rapidly-growing steel industry but that was separated by thousands of miles of ocean. Back then, iron ore was cheap and bulk international shipping was expensive, so no-one thought that Vale could compete with Australian producers, who were much closer to Japan.
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Eliezer thought differently. He created a more efficient system of rail and port infrastructure transport. He also commissioned the design of new ships that, for the first time, could travel out with iron ore and return with Japanese merchandise. By carrying two loads the journeys became much more profitable. As he told me: “Iron ore was too cheap so I decided to make us a logistics company instead of a commodity producer”. Vale’s transport innovations were copied around the world and it’s one of the earliest examples of a leading multilatina.
More recently Petrobras has taken the mantle of Brazil’s – and Latin America’s – biggest company. What makes Petrobras’s rise impressive was that for decades people wrote it off. It was created by then President Getúlio Vargas in 1953 to make the country self-sufficient in oil. The trouble was, Brazil didn’t have much oil. Most leading geologists had already concluded that exploring for oil in the country was a waste of time. The lack of ‘easy’ onshore oil encouraged Petrobas to move abroad, striking deals in foreign countries. It also engaged with subsea oil experts in the North Sea to help it explore opportunities off its coast. Then, after a big offshore discovery had confirmed the potential of Brazil’s continental shelf, it established Cenpes – Latin America’s largest technology research centre – in 1968.
I was lucky enough to go to Cenpes to interview Petrobras’s head of production development. It was an impressive place. It felt like the elaborate lair of a megalomaniac James Bond baddie. Inside, white-coated lab technicians swarmed about the place while different departments worked on everything from using undersea drones to get oil from the sea to one day replacing it with next generation bioethanol. All of the world’s leading oil service companies have bases around Cenpes, jostling to work with Petrobras and share technology.
The investment in subsea technology has paid off. Offshore oil helped Petrobras achieve the self-sufficiency goal while recent huge discoveries deep below the seabed look likely to turn it into a major exporter. The oil is deep and difficult to extract but at least now, thanks to Cenpes, the Brazilians are the leaders in this type of ‘ultra-deep’ oil. Moreover, it’s a skill that will come in handy abroad as the world increasingly turns to offshore oil in the decades to come.
Vale and Petrobras deserve respect as early multilatinas. But they’re not good investments for New World readers. The common theme here is that both were founded as state champions and though they’ve partially listed they still receive a lot of political ‘direction’. And while I think they’re great engines of growth for the Brazilian economy, I don't think you should be investing in Latin America through stocks like these.
Buy the next generation of multilatinas
Instead, I prefer the next generation of multilatinas. In particular I like the service companies, banks and retailers that are spreading out across the region – serving the needs of their own economies.
This is a theme that my colleague Lars Henriksson picks up on when he talks about Southeast Asia. People in Asia and Latin America are increasingly looking to invest in their neighbouring economies to secure their prosperity. And that is a great opportunity for the discerning investor.
One source of the new multilatinas is Chile. As any regular New World reader will know, Chile is the most advanced economy in the region. Thanks to its prudent management of the commodity boom it’s on course to become Latin America’s first ‘rich’ country. As a result of the growth, Chilean firms and pension funds are cash-rich and given Chile’s tiny domestic market – it has a population of just 17 million – they are eager to invest elsewhere on the continent.
In October Chilean retail giant Cencosud announced that it was buying the Colombian operations of French rival Carrefour for $2.6bn. For Cencosud it was an obvious move to buy into the fast-growing Latin American market. For Carrefour it was some welcome cash as it struggles to cope with its poorly performing European divisions. Cencosud is now the region’s third-biggest retailer with department stores, supermarkets and DIY chains across Chile, Peru, Colombia, Argentina and Brazil.
Indeed the Chileans have been very active in Colombia recently. I met the Colombian ambassador to the UK the other week, and he told me of a string of deals where Chilean firms were buying up Colombian rivals. Chile’s CorpBanca recently bought up Colombian Helm Bank for $1.3bn. That followed its June purchase of Spanish bank Santander's Colombian assets for $1.2bn. Chilean firms have also been active in Uruguay, where listed entertainment firm Enjoy splashed out $140m on a casino.
Meanwhile, Santander isn’t the only European bank selling up. In 2011 struggling Dutch finance group ING sold its Latin American assets. Though this time a Colombian firm, Grupo Sura, beat off competition from CorpBanca to win the $3.5bn deal. And the sales of retreating Europeans seem likely to continue. Spain’s number two bank, BBVA, is considering selling up its Latin American pension business, while elsewhere in the region Santander floated 20% of its Mexican operations for $4bn.
Peruvian multilatinas are also starting to flex their muscles. Last year Peru’s biggest dairy producer, Grupo Gloria, bought a stake in a Uruguayan rival. It means Gloria now has operations in Peru, Bolivia, Ecuador, Argentina, Colombia, Puerto Rico and Uruguay.
And, as I mentioned in my last piece, one of my favourite Latin American banks, Peru’s CrediCorp, recently bought up a Chilean rival.
Of course regional domination isn’t always a walk in the park. Once these national champions leave their local markets, where they’ve often got a good understanding with regulators, they’re subject to the same problems some of the European firms faced.
For example Colombian power transmission company ISA has a lucrative Brazilian subsidiary, CTEEP. But it recently came a cropper when the government there changed the rules and lowered the price firms could charge for electricity.
Nevertheless this spread of multilatinas offers a handy way for investors to gain exposure to a range of Latin American countries. Moreover as more multilatinas try to raise funds to buy out European and regional rivals, more are likely to list on American or European stockmarkets, making them cheaper and easier to buy for small investors here in Britain.
Of the stocks listed above I like the look of Cencosud (NYSE:CNCO.T). The firm is run by Chile’s second-richest man, Horst Paulmann, a German immigrant who came to the country after the Second World War. This summer the firm listed in the US making it accessible to British investors for the first time. Let’s get this straight – this is not a stock for widows and orphans. For starters, it’s not cheap. After all, the reason Cencosud listed in America was to get its hands on foreign capital and Bloomberg currently puts the firm on a forward p/e of 22. Moreover, it’s stocked up on debt, with outstanding loans at about 5.5 times earnings.
It’s pricey and a bit risky but I think, in the long run, Cencosud will reward investors. It might have taken on a lot of debt but it’s made some great acquisitions and has a presence in South America’s most exciting markets. Its range of supermarkets and department stores also give it exposure to a large swathe of the continent’s consumers. In effect it’s a bet that Latin America’s economies will continue to grow and that its shoppers will continue to spend – at home.
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