Stars Are Aligned
A new breed of operationally sound companies with enlightened leaders swept LatinFinance's third annual survey of the best and worst companies in the region
The corporate universe in Latin America is getting more interesting. Multinationals captained by visionary leaders are fanning across the globe through audacious acquisitions and clever financing. A constellation of fresh young companies in consumer industries like pharmaceuticals and retail shines across the region's stock markets.
Backing this shift is strong economic growth, falling interest rates and robust consumer confidence in a number of countries. If Latin American companies can tap into this encouraging panorama to create long-term value, then the region just might be able to avoid some of the boom-bust cycles it has ridden in the past.
LatinFinance surveyed 25 leading portfolio managers, investment bankers, equity analysts and ratings agency directors to identify the best companies in Latin America, as well as some falling stars. The portfolio managers we chatted with have $34.9 billion in assets invested in emerging market equity and fixed income securities, and the bankers that shared their insight with us advised on $6 billion in corporate debt deals last year, $17.2 billion in M&A and $3.1 billion in equity offerings.
The results were both intuitive and surprising. Although much of the region is enjoying high times because of record commodity prices, the experts we spoke with chose innovators over extractors, saying that mining and oil companies are merely in the right place at the right time. The exception is Tenaris, the steel oil pipe manufacturer from Argentina, which has used the oil boom as an opportunity to expand into other parts of Latin America and even further, into places like Kazakhstan. Among large companies which we defined as entities with annual revenue above $5 billion those polled agree that New York Stock Exchange newcomer Tenaris is the best (see Rankings).
Most of the growth, the insiders say, can be found in companies that are benefiting from flourishing domestic economies and the growing purchasing power of Latin American consumers (see Riding The Consumer Boom, p. 39). Well-managed airlines, homebuilders and food processors are hot, while a number of construction firms like ICA in Mexico - have come back from near death (see Constructing A Comeback).
With few exceptions, though, traditional Latin American blue chips failed to even get a nod. Portfolio stalwart Telmex, the Mexican phone operator, was even mentioned a handful of times as a potential falling star since its progeny, América Móvil, has shot well past its one-time parent. Among large companies, América Móvil was tagged with having the best strategy for both growth and financing.
Opportunities abound for those thinking outside the box, such as Brazilian no-frills airline Gol Linhas Aéreas Inteligentes, which swept three categories among mid-sized companies, or those with annual sales between $500 million and $5 billion. Apart from naming Gol the best company of its size, our panel of experts praised the airline's management team especially CEO Constantino de Oliveira Júnior and its finance strategy. "It is admirable what they have done from a visionary point of view," comments Matthew Hickman, director of Latin American equities forCredit Suisse Asset Management.
Our panel thought Gol's use of US Export-Import Bank loans to purchase Boeing aircraft was clever, but they were especially bowled over by the carrier's $200 million perpetual bond. The April issuance came during some rocky days for the markets, on the heels of the resignation of Brazilian finance minister Antônio Palocci and after some negative language from the US Federal Reserve. Even so, it was snapped up, largely by Asian retail investors. "These guys go beyond borders to raise money," marvels one banker who participated in our poll on the condition of anonymity.
According to financial markets data provider Dealogic, Latin American companies have issued $7.5 billion in perpetual bonds through 18 deals since Mexican oil company Pemex first tested appetite for such issues with its $1.75 billion perpetual in September 2004. Several Brazilian companies have since launched perpetual bonds, starting with petrochemical company Braskem $150 million bond sale in 2005, thereby revolutionizing financing in the country. Now, "companies can keep up long term investments" rather than being "concerned about funding on a quarterly basis," says Pedro Bastos, director at Unibanco Asset Management, which has $18.8 billion in assets under management.
"Perpetuals, in theory, never have to be repaid," adds Eric Ollom, a director in fixed income research at ING. Ollom notes that with US interest rates at record lows, the price on such deals should remain attractive at least until Brazil reaches investment grade.
Also getting in on the perpetual action is Brazilian alcohol and ethanol producer Grupo Cosan, which ranked as the best mid-sized growth company in our poll. Cosan is seen benefiting from demand for alternative sources of energy as the US and Europe scramble to counter high oil prices. "Three years ago few people knew Cosan even existed," says Guillermo Jasson, head of investment banking at Morgan Stanley. "Since then it has issued its inaugural bond, done a very successful IPO and issued a perpetual bond with the lowest Brazilian corporate yield ever."
By going from privately held company to sophisticated capital markets darling, Cosan characterizes the transformation that many Latin American companies have undergone in the past couple of years. Cosan set out in 2000 to lead the consolidation of Brazil's sugar industry, and has morphed into a leading ethanol producer at warp speed (see A Consolidated Cosan Hits The Highway).
Consolidation has proven to be key for growing companies in the region. Diagnósticos da América SA (DASA), Latin America's largest clinical laboratory and diagnostic imaging company, followed a path similar to that of Cosan as it tapped Brazil's equity market in a quest to become a consolidator in its industry. DASA's transformation resulted from a private equity infusion from several funds led by Brazilian independent investment management and advisory firm Pátria in 1999. It acquired six companies between 1999 and 2004, and raised $159 million in an IPO in Brazil in November 2004. Since its market launch, DASA has made four more acquisitions.
DASA tied with MercadoLibre, Argentina's answer to Internet auction company eBay for the LatinFinance prize of best small company among those with annual sales under $500 million. Privately held MercadoLibre got its start with private equity backers, too. In November 1999, JPMorgan Partners, Flatiron Fund and Hicks, Muse, Tate & Furst injected $7.6 million into the venture. Seven months later, Goldman Sachs, Fondo CRI Banco Santander Central Hispano, GE Equity, JPMorgan Partners and Hicks, Muse, Tate & Furst infused another $46.5 million. Then EBay took a 19.5% stake in MercadoLibre in 2001 in exchange for eBay's Brazilian operations. In 2005, more than a million MercadoLibre users sold $608 million worth of goods online. Half of those transactions took place in Brazil, with the rest stemming from the eight other Latin American countries where MercadoLibre operates.
Companies that have expanded beyond their borders get kudos. Years after setting out to become a global powerhouse, Mexican cement group Cemex now the world's third largest cement company still draws admiration for blazing a trail for the new breed of Latin multinational companies. Bold and astute expansion strategies are fine and dandy, if the companies can grow organically after slowing down the spending sprees. Pan-regional wireless operator América Móvil has also shown remarkable acquisition prowess. "At some stage growth will taper off, and because they will no longer be subsidizing new handsets, their margins will expand," notes Sebastien Chatel, head of Latin American equity capital markets at UBS. "That will help drive ongoing earnings growth."
América Móvil increased subscribers by 85% last year to 93.3 million. Through organic growth and the entry into new markets Chile, Paraguay and Peru the company attracted 32.2 million clients to its rosters. In April 2006, it added the Dominican Republic, Puerto Rico and Venezuela to its market scope. Wisely, América Móvil has opted to issue local currency-denominated debt in a number of the countries it has entered. The company also commands some of the tightest pricing in international and domestic bond markets (see Building a Behemoth).
Leading By Example
In April, América Móvil and Telmex teamed up to buy Venezuelan communications provider Compañía Anónima Nacional Teléfonos de Venezuela (CANTV) for $636.6 million in yet another instance of fudging the boundaries between the companies, which are both controlled by Mexican billionaire Carlos Slim.
The ability to manage assets and liabilities is only part of the equation. When considering their favorite corporate decision makers at large companies, our participants looked for business leaders who bother with the minutia of operations while also being ever aware of how to tap into global trends. Names that came up include: Tenaris CEO Paolo Rocca for "catching the cycle at the right time" or "being into the details," and Cemex CEO Lorenzo Zambrano for "having tremendous vision" and "starting a new era of Latin American companies as global players."
In the end, Roberto Setúbal, chairman of Brazil's largest private sector bank, Banco Itaú, took the cake. While foreign banks have pillaged Mexico's financial sector, Brazilians like Setúbal are kicking out the invaders and turning pretty profits for investors. "That has a lot to do with talent of the top executives in Brazil," says Unibanco's Bastos, adding that Setúbal "incorporates the power of the performance of Brazilian banks as a whole."
Analysts with UBS Investment Research predict that lending in Brazil will expand for years to come by more than 15% annually outpacing growth predictions for financial sectors in most other countries.
Pedro Damasceno, a partner at Brazilian asset management firm Dynamo, which has $850 million in assets under management, estimates that Setúbal has delivered total shareholder return of around 30% in dollar terms over the last decade, complemented by "a huge improvement in corporate governance practices." Itaú's profitability is especially remarkable considering the sharp economic swings that Brazil has endured over the past decade.
In early May, Setúbal brokered a groundbreaking $7 billion acquisition of Bank of America's Brazilian assets, boosting Itaú's assets by $9.7 billion to about $74 billion and making it the largest private sector bank in the country. In return for the asset, which Bank of America had picked up as part of its $48 billion purchase of FleetBoston in April 2004, the US financial giant took 5.8% of Itaú's capital.
Itaú didn't stop there. It also negotiated the right to purchase Bank of America's assets in Chile and Uruguay, setting the stage for its expansion beyond Brazil, (see interview with Setúbal).
In spite of its trials in Indonesia (see Don't Let the Door Hit You, p. 33), perennial investor favorite Cemex placed as the company with the best management team in the region. At the risk of sounding dull or repetitious, a number of those we polled said they had to hand it to the higher ups at Cemex. "Zambrano as a CEO likes to get his hands dirty," says Credit Suisse Asset Management's Hickman. "I like a chairman who knows what is going on his business."
It's CFO Rodrigo Treviño, though, who largely gets the credit for having deftly absorbed multi-billion acquisitions like Cemex's $5.8 billion purchase of UK cement company RMC. In 2005, just a year after buying RMC, Cemex had reduced its net debt to EBITDA ratio to 2.3 times from 2.7 times in 2003. In the same period, net sales grew 88% versus 2003, to $15.3 billion, and net profit rose 63% to $2.1 billion. "The RMC integration was very well done," says ING's Ollom. "They borrowed a lot of debt and paid it down faster than people expected. They were very conscientious about that."
Adds Morgan Stanley's Jasson: "Cemex is benefiting from a snowball effect its huge cash flow allows them to be very acquisitive, only making their cash flow and investment capacity even larger."
Even the misadventure with Semen Gresik, the Indonesian company that Cemex said in May it plans to sell, has not curbed the company's appetite for growth in developing countries. In late April, at Cemex's annual meeting for shareholders in Monterrey, Mexico, CEO Zambrano prepared investors for an eventual entry into the Chinese market. "It will represent a very important source of growth," Zambrano told them. Cemex is in 50 countries, but its ready mix cement business is absent from high-growth markets like Brazil, China, India and Russia.
Transforming Corporate Culture
Mexico, like other Latin American countries, has a long history of nepotism in family-run companies. But some are starting to forge their own corporate cultures based on merit. Nicolaas Millward, managing director in Latin America equity capital markets at UBS, praises Cuauhtémoc Pérez Román, chairman, CEO and founder of Mexicali, Mexico-based home builder URBI, for transforming a family-owned business into a successful public company. "He has given stock to employees," notes Millward. "He decided about three or four years ago that he wanted to institutionalize the business. Since there may be no immediate family successors, the thing to do was to take the company public. That is not a view that many have in Mexico and few have the farsightedness to pull it off."
Credit Suisse's Hickman holds up Gol's Constantino de Oliveira Júnior as "a good example of how the second generation got it right." The De Oliveira family has operated a quiet, privately held bus company in Brazil for more than five decades, but Gol and its executives bask in the investor spotlight while regularly giving interviews to the press. Other Brazilian companies regularly phone up the Gol team for tips on how to improve their investor relations.
Unibanco's Bastos says he'll take high returns over transparency any day. Brazilian brewer AmBev's sale to Belgium's Interbrew in March 2004 angered many minority shareholders, who did not receive tagalong rights in the sale. But Bastos still lauds AmBev's management. "They excel at execution," he says. "Quarter after quarter they show operational improvements. They have a great share buy back program, and they paid an additional dividend when they anticipated a purchase of Quilmes in Argentina. They are delivering," he asserts. AmBev's last CEO, Carlos Brito, is now running InBev, the combined Brazilian-Belgian beverage company. "Brito and the others all come from the same school, and that is a culture that works well," Bastos says. "Brito is running Inbev and that is good news for all shareholders."
It's clear that investors punish companies that fail to deliver. Between its $216.4 million initial public offering in October 2004 on Brazil's Novo Mercado and the end of April, shares in Brazilian footwear manufacturer Grendene had collapsed 42.9%. "They disappointed by over-promising and under-delivering in the first quarter after their IPO," says Credit Suisse Asset Management's Hickman. "When that happens, you think twice before taking what management tells you at face value." For hugely disappointing markets, Grendene is this year's falling star.
Mexican glass company Vitro, which has been engaged in a painful three-year cost cutting kick, also came close to taking home the wooden spoon. "They have made some asset sales and been able to refinance some debt, but they are basically running out of time," says ING's Ollom. "Of all companies that I follow I would say Vitro has the highest chance of defaulting in the next year. They have been hurt by natural gas prices in 2005 and they remain highly leveraged."
Most of our survey participants concluded that the decline of Vitro has been too long and steady to merit the LatinFinance booby prize. Yet Vitro is one of only a few Latin American companies that remain mired in financial trouble amid an economic up tick in the region that has helped a number of dogs emerge in better financial shape. Brazilian cable company NET, for one, has reorganized its debt while keeping up capital expenditure. "They invested when they were shaky financially, but it is paying off now," says Unibanco's Bastos. "They are very competitive in broadband, TV and with income going up in Brazil they should be able to dilute their fixed costs very rapidly."
Most impressive, though, has been the turnaround at Mexican construction firm Empresas ICA. "I couldn't really think of any better turnaround story," says UBS's Millward. "ICA was an important construction company involved in toll roads, but when the Mexican toll road model didn't work out, they suffered. But they stuck to their construction business and with the growth in infrastructure projects have achieved the most successful turnaround in its business."
Another Mexican stalwart beverage conglomerate Femsa has also demonstrated foresight and gumption. By investing in hand-held devices for its deliverymen four years ago, the company has squeezed efficiencies out of its distribution network. Meanwhile, the expansion at its convenience store chain Oxxo, which is edging out traditional mom-and-pop stores, has propelled that unit's sales past those of Femsa's flagship beer business. The company has also stood firm next to its brewing arm, taking charge of its distribution in the US to win market share there from top competitor Grupo Modelo.
As Latin America's economic prospects brighten, a cluster of star companies is preparing to seize the opportunities of economic growth in the region's flourishing economies. Armed with healthier balance sheets and commanded by bold leaders, the possibilities for growth at home and further afield have never looked brighter. LF
The introduction of flex-fuel cars, which can run on any mixture of ethanol and gasoline, has put sugar producers like Brazil's Grupo Cosan in the fast lane. "Ethanol is in the early stages of growth and we see huge opportunities both in Brazil and for exports," says Paulo Diniz, CFO of Cosan, Brazil's largest integrated sugar and ethanol producer. Ethanol accounted for 30% of Cosan's $795 million revenue last year, and the company expects sales of the fuel to grow by more than 3% annually going forward.
David Masse, a portfolio manager at Standard Asset Management, says that while Cosan should indeed benefit from a burgeoning interest in alternative sources of energy such as ethanol, it's a new streamlined capital structure that makes the company an interesting one to watch. When the Brazilian government threw off decades of protectionism in its sugar industry in 1999, it opened the door for more than 300 sugar mills operated by 100 family-owned companies to consolidate. "We took the position that we would prepare the company to grow mainly through acquisitions and be one of the consolidators," Diniz explains.
In 2000, six family-owned mills merged to form Cosan and by 2005 the company had amassed 10% of Brazil's sugar and ethanol market. In February, when Cosan acquired local producer Acucareira Corona for $182.23 million, it became the largest sugar exporter in the world. It now operates 16 mills with an annual crushing capacity of 39 million tons ofsugar cane.
With sugar prices hitting a 25-year high in February, and Cosan aiming to supply 20% of the ethanol consumed in Brazil within seven years, the company has ample room to grow.
It's also well capitalized. The company issued a $300 million perpetual bond in January, and reopened it the next month to fetch another $150 million. Prior to that sale, Cosan raised $403 million in November through an IPO on the São Paulo Stock Exchange and $200 million through five-year bonds sold in international markets in 2004.
Now that the company has longer-term credit, it reckons that fluctuations in international sugar prices will be easier to ride out. In previous years, Cosan, founded in 1936, was often forced to sell its crop at below-market prices. Next stop, Diniz says, will be a listing on the New York Stock Exchange.
Since Mexican fixed-line phone operator Teléfonos de México (Telmex) spun off its wireless arm in 2000, América Móvil has used strong cash generation from its home market to fund an aggressive acquisition strategy across Latin America and the Caribbean. Last year, América Móvil's $17 billion revenue outstripped Telmex's $15.2 billion in sales.
Carlos García Moreno, América Móvil's chief financial officer, says the company is now close to achieving its dream of being a truly pan-regional wireless company. The April $3.3 billion purchase of Verizon Communications' Caribbean assets included a 14.3% stake in leading Venezuelan communications provider Compañía Anónima Nacional Teléfonos de Venezuela (CANTV), sealing the Mexican company's footprint in South America. García Moreno says América Móvil has no plans to venture into Bolivia.
Nonetheless, there's room to launch further assaults. "There is still scope for continual expansion and what is missing is the Caribbean," García Moreno insists. "If there are opportunities there, and it makes sense, we will seize them."
América Móvil is widely admired for its success. Eric Ollom, a fixed income analyst at Dutch bank ING, says it has a deft ability to fold acquisitions into the company. "That is going to show in their results as the Brazilian acquisitions mature and as they bring on recent acquisitions," he explains. América Móvil bought two mobile phone operators in Brazil in 2003, where it turned in EBITDA of 15.6% in the first quarter of this year compared with a negative margin of 4.6% in the last three months of 2005. Over the past four years, América Móvil's EBITDA margin hasn't dipped below 30%, even as assets more than doubled to $22.05 billion and annual revenue more than tripled.
Strong cash flow in its Mexican operations, which accounted for 48.2% of overall revenue at the end of March, have helped the wireless company use its A3/BBB+ rating to raise dollar and peso debt at spreads tight to the Mexican curve. Victor Galliano, head of Latin American equity research at HSBC, credits América Móvil with pursuing a "very good long-bond strategy with a very tight spread to fund acquisitions in Latin America cheaply."
"The early maturity phase in which Latin American mobile margins rise as subscriber growth begins to slow is shaping up healthier than expected," analysts with UBS Investment Research said in a May note. "We keep thinking the super-boom has to give way to a mere boom soon, but we keep being wrong."
Brazilian companies swept LatinFinance's corporate poll this year, winning six awards in 11 categories, followed by Mexican companies with four prizes and Argentine companies with two awards. We surveyed 25 leading portfolio managers, heads of investment banking, equity analysts and ratings agencies to find the best companies in Latin America and the Caribbean. Our portfolio managers have $34.9 billion in assets invested in emerging market equity and fixed income securities. Our investment bankers advised on $6 billion in corporate debt deals last year, $17.15 billion in M&A deals with Latin American acquirers, and $3.1 billion in primary and secondary equity offerings. Some members of the panel went on record with their votes, while others requested anonymity in exchange for more candor.
We asked them to vote for their favorite companies in three categories: large, mid-size and small. We defined large companies as those with annual revenue above $5 billion, such as Mexican wireless company América Móvil, which had sales of $17 billion last year and Brazilian iron ore producer Companhia Vale do Rio Doce with 2005 sales of $13.4 billion. For mid-sized companies, we wanted to hear about those with revenue between $500 million and $5 billion, such as Chile's LAN airlines, which reported sales of $2.5 billion in 2005. Small companies were those with revenue under $500 million. We used revenue as a guide in the hope that our participants would name companies that are privately held, or that have small market floats. To keep things fresh, we asked that they consider activity in the 12 months leading to June.
We then asked them to vote for the best companies and business leaders for each revenue segment, while also identifying top growth stories and the best financing strategies out there. Additionally, they chose a turnaround that has been evolving over the past 12 months in the region, as well as a major disappointment, or falling star.
Brazilian low-cost airline Gol Linhas Aéreas Inteligentes won the most awards overall, taking home three nods from our panel. Our participants voted Gol CEO Constantino de Oliveira Júnior the best executive among mid sized companies, while also singling the company out as having the most innovative financing strategy and being tops over all for its revenue category.
Mexican wireless company América Móvil racked up two awards: best growth company and most innovative financing strategy in the large-cap category. But it was Argentine manufacturer and supplier of seamless steel pipe products and provider of services to the oil and gas industry, Tenaris, that won overall the moniker of best company in the large revenue segment. Tenaris, owned by Argentina's Techint group, listed on the New York Stock Exchange in March.
Grupo Cosan, one of the largest producers of alcohol and ethanol worldwide, barely beat out Gol for bragging rights as the best growth company in the mid size category, and Argentine Internet auction company MercadoLibre tied with a Brazilian medical diagnostics company Diagnósticos do América (DASA) as the best company in the small category. Our participants said Mexico's largest engineering, construction and procurement company, Empresas ICA pulled off the best turnaround in corporate Latin America in recent memory, and ranked Brazilian footwear manufacturer Grendene as the most disappointing corporate story in the past 12 months.