Cleaning House

Bancolombia, Colombia’s biggest bank, is the best-known asset held by Medellín conglomerate Grupo Empresarial Antioqueño (GEA).

page24-sm.gif

Colombia’s Grupo Empresarial Antioqueño has been busy streamlining its corporate structure and making itself more attractive to investors.

Bancolombia’s headquarters in Medellin.

The countryside around Medellín is spectacularly beautiful. The green valleys and sharp mountains look more like the Switzerland of the von Trapps than the tropical Colombia of Gabriel García Márquez. But there aren’t many people in bustling Medellín with an interest in nature. A more likely focal point for the industrious paisas – as the natives of Medellín are known – is the towering headquarters of Bancolombia, shooting up into the sky like a rocket ready for takeoff.

Bancolombia, Colombia’s biggest bank, is the best-known asset held by Medellín conglomerate Grupo Empresarial Antioqueño (GEA). Over the years, GEA evolved into a messy collection of businesses and cross-shareholdings that defy logic. Investors admire the group’s driven and shrewd bosses but are less impressed by its confusing corporate structure. Why should the country’s biggest bank – Bancolombia – be 10% owned by two cement companies which are both part of the GEA empire?

Having consolidated its position in Colombia, GEA is beginning to look abroad for both financing and market opportunities. But to generate the capital necessary for expanding outside the country, GEA must convince investors that it has reworked and improved its ownership structure.

GEA traces its origins back to the 1970s, when a group of local companies banded together to ward off takeover attempts by competitors in Bogotá. By the mid-90s, GEA was a group of 130 companies with an overlapping shareholder structure. Apart from owning shares in each other, the companies all adopted the same goal of investing for the long term.

As the GEA family of companies expanded, they learned that capital markets frown upon conglomerates, especially those that lack obvious synergies and are bound by complex cross-shareholdings. And GEA wanted to raise cash. “In the 1990s, we began discussing a transformation of the group,” says Jorge Londoño, president of Bancolombia, one of the pillars of GEA. “Highly diversified conglomerates are not perceived well by the market, and we realized we were going to need to be able to go to the market to grow.”

Over the past five years, GEA has quietly consolidated its disparate shareholdings into three clear groups: construction assets are now concentrated around Cementos Argos; banking assets come under Bancolombia and insurance company Suramericana; and food makers are held by Compañía Nacional de Chocolates. These umbrella companies, in turn, took shares in each other, rather than holding stakes in various subsidiaries.

The group chose these three companies as anchors, says Nacional de Chocolates president Carlos Piedrahita, because they are the “most successful” and they have the best prospects for the future. Operating companies that GEA decision makers thought had limited growth potential, or that did not fit in with the new structure, were sold.

Sugar Rush
The consolidation effort won plaudits from the market. Mauricio Botero, president of Corredores Associados, a brokerage in Bogotá, endorses the GEA strategy. “What they have done has been well thought out,” he enthuses. “It’s gone down very well. They’ve simplified, they’ve clarified and they’ve had a good focus and are headed in the right direction.” Botero feels that most everyone agrees the evolution of GEA has been good for the group and the country.

Nacional de Chocolates is a perfect example of this evolution. Until 2000, three different GEA companies were in the food production business. Nacional de Chocolates produced coffee, as well as chocolates, while Noel, a cookie maker, also owned a meat packer. Then there was Doria, which makes pasta. Says Piedrahita, “In the 1980s, 1990s foreign investors didn’t understand our corporate structure.” In 2002, to get the food unit in order, GEA created a holding company – Inversiones Nacional de Chocolates SA – that owns and oversees all 34 food and beverage operations, which are further organized into six lines of business: chocolate, coffee, cookies, pastas, meat packing and candies.

Under this arrangement, 80% of Inversiones Nacional de Chocolates’ balance sheet is in food and beverage, while other GEA companies – like cement company Argos and retailer Almacenes Exito SA – make up the rest. Publicly listed Inversiones Nacional de Chocolates is looking especially attractive to equity investors these days in the wake of SABMiller’s $7.8 billion acquisition of brewer Bavaria in 2005. The Santo Domingo family’s decision to sell Bavaria to a multinational makes Inversiones Nacional de Chocolates the only independent food and beverage company listed on the Bogotá Stock Exchange.

Sweet Sensation
Since reorganizing into Inversiones Nacional de Chocolates, the food company has also changed its attitude toward joint ventures and strategic partnerships. Danone, the French food giant, took a 30% share in Galletas Noel – part of Noel – in 1999 for an undisclosed sum. Last year, Inversiones Nacional de Chocolates bought back that share for $50 million. Piedrahita says Danone offered to bump up its stake in Galletas Noel to 51%, but that Inversiones Nacional de Chocolates decided to unwind the alliance because management felt that having decisions come from Paris – six time zones away – compromised Noel’s independence and agility. “Multinationals take very broad decisions – not localized ones,” says Piedrahita. And neither do they have much to contribute anymore. “We’ve discovered that Colombia is different from Peru, which is different from Ecuador. The truth is that a multinational is not so different from us,” says Piedrahita. “We buy our industrial technology from the same suppliers they do. And financial resources are not a limiting factor for us at this time.”

Rather than depend on Danone to provide technology, Inversiones Nacional de Chocolates decided that its own distribution model was good enough to export to neighboring countries. “We have a business model that is successful for Latin America,” says Piedrahita. “We have a capillary distribution system – we’ll go to the mom-and-pop stores. Our distribution arm is like an army of ants,” he says, adding that the company’s products are available in 1,040 of Colombia’s 1,080 municipalities. Foreign multinationals, Piedrahita asserts, seem to concentrate on large urban markets and ignore rural customers; they also zero in on supermarket chains, whereas mom-and-pop stores still account for the bulk of consumer goods sales in Colombia. Part of Inversiones Nacional de Chocolates’ distribution strength is its ability to tap unconventional channels. Piedrahita describes Nova Venta, a wholly owned subsidiary of Chocolates, as the “Avon” of foods since it sells Chocolates and Noel products through a workforce of 25,000 women going door-to-door.

Just four years ago, Cordialsa, the company’s international distribution subsidiary, had a presence only in Ecuador, Mexico and Venezuela. Nowadays, Inversiones Nacional de Chocolates’ distribution arm reaches even further afield, hitting 11 countries from the US down to Ecuador. This branching out is part of Chocolates’ decision to focus on what it considers “strategic regions” – the Andes, Central America and the Caribbean basin – while also getting its feet wet in potentially lucrative areas like the US Hispanic market. Piedrahita notes that Peru and the Dominican Republic are missing from Cordialsa’s network, and says that Chocolates is interested in exploring those markets.

Chocolates is also looking to manufacture overseas. In December 2004, the company bought two factories in Costa Rica from Nestlé, along with several local candy brands, such as Jet, Chocobola and Chocolisto. In 2004, Nestlé sold $15 million worth of candy produced in its Costa Rican factories. Chocolates has made these facilities more efficient, which has helped boost sales of the Costa Rica-made candy. “We increased sales from those factories by 90% last year,” says Piedrahita. He says this was possible after Chocolates began using its door-to-door distribution model in Costa Rica. The company wants to increase overseas production in the future through similar acquisitions, focusing in particular on coffee, meat and cookies.

So far all acquisitions have been financed by Chocolates’ balance sheet or through bank loans. Of the cash used to buy back Danone’s stake in Galletas Noel, $35 million came out of the company’s war chest, while the remainder was supplied by a bank loan. As of September 2005, Chocolates had only $14 million in debt compared to $1.3 billion in stockholder equity. For the first nine months of the year, the company reported sales of $98.7 million, nearly three times its revenue for the same period of 2004. Piedrahita said Chocolates plans to borrow more heavily when making future acquisitions so that it can increase returns on shareholder equity.

GEA’s two other business pillars have undergone similar restructurings. Last year, Bancolombia merged with two members of the GEA group – mortgage provider Conavi and investment bank Corfinsura. As part of the reorganization, Corfinsura spun off some of its operations to insurer Suramericana. The Bancolombia deal is still in its final stages – Londoño carries business cards with logos from all three banks he now heads because the newly merged entity has not yet decided on a corporate image.

Consolidating Construction
GEA also regrouped its construction companies around Cementos Argos last year, scrapping the Cementos del Caribe name. At the end of 2005, seven GEA-controlled cement companies merged to form Cementos Argos, Colombia’s biggest company and Latin America’s fifth-largest cement producer with a market capitalization of $5.69 billion. This combination came on the heels of Argos’ purchase of two concrete companies in the southern US in the second half of 2005 for $450 million. A listing of American Depositary Receipts on the New York Stock Exchange might be the next step for the company, says Botero.

The GEA companies recognize that while they are big fish in Colombia, they are minnows on the global stage. “In 1998, we were 0.65% the size of Citigroup,” says Bancolombia’s Londoño, comparing his bank to the world’s largest by market capitalization. “Today, we’re 0.83%. There’s been no relative growth. Growth is the most important element of our strategy.” But Bancolombia is conservative in its approach to growth, cautions Londoño. “We’re looking at growth that produces value. We’ll only [make an acquisition] if it’s a wise decision – one that goes towards growing shareholder value.”

In addition to this series of mergers, GEA has spun off non-core companies – including logistics, fertilizer and charcoal firms – and unloaded some assets. The group sold its tobacco company, Coltabaco, to US tobacco giant Altria for $300 million in the first quarter of 2005. Piedrahita said the company is also mulling the sale of a hotel chain and considering taking textile company Coltejer public.

Because of the group’s size, these changes affect not only GEA, but also the country as a whole. Combined annual sales of GEA companies equal several percentage points of Colombia’s $118 billion GDP. GEA’s eight listed companies have a market capitalization of $20.3 billion, or 45% of the value of all the companies listed on the Bogotá Stock Exchange at the beginning of this year.

Their gains helped Colombia’s key IGBC index, which jumped 129% in dollar terms last year, turn in the best performance out of all Latin American stock indices in 2005. “If you want exposure to Colombia, you need exposure to GEA,” says Botero of Corredores Associados. Pension funds that benefit from obligatory contributions from workers have been driving that advance, investing 14% of their portfolios in equities. Normally Latin American pension funds are more conservative than these Colombian funds, opting to invest most or all of their cash in fixed-income.

This year, Colombia is expected to repeat its 4% GDP growth, Correval, a Bogotá brokerage, says in its annual survey of the Colombian economy. The brokerage believes most of the drivers behind last year’s stock performance should continue this year – pension fund portfolio investments in the IGBC are expected to grow at a rate similar to the 33.2% expansion seen in 2005. Even though presidential elections are due in May, investors and business leaders are confident that President Álvaro Uribe will easily win reelection to a second four-year term. “The economic dynamic will continue,” says Botero. “There’s a lot of confidence, and international players – such as Wal-Mart, Falabella, Zara and Burger King – are looking to get into Colombia.” As these companies and investors seek to capture some of the returns of the Colombian market, they’ll be eyeing GEA companies.



So Near, Yet So Far

SABMiller’s purchase of Colombian brewer Bavaria naturally raises the question of whether parts of Colombian conglomerate GEA might be up for sale. “I doubt it,” answers Carlos Piedrahita, president of Nacional de Chocolates, GEA’s food business. “We’ve received offers from Hershey’s, Cadbury’s, Kraft, Nestlé and others. We’ve talked it over with our executive committee and investors, and decided ‘no’,” he says. Jorge Londoño, president of financial group Bancolombia, also a GEA company, agrees that asset sales are highly unlikely, especially since no single family owns all of GEA. “Unfortunately, I am not a majority shareholder,” he says with a wry smile. “No one who owns [Bancolombia] shares is looking to redeem their investment.”

Mauricio Botero, president of Corredores Associados, a Bogotá brokerage, notes that while there are Medellín families that own a combined 10%-15% in each of the GEA companies, they share the group’s philosophy of independent growth. He concedes, however, that foreign appetite for exposure to Colombia’s growing economy could spark a sale. “You can look at the case of Banamex in Mexico, where a conservative, traditional bank was bought out by a large foreign bank,” he says, referring to the $12.5 billion purchase of Mexico’s largest bank by Citigroup in 2001. One day, a global company might make a similar offer, one which GEA company shareholders won’t be able to refuse.