Translatinas. Pursuing Intraregional Opportunities. Carlos Braga Executive Director ABN AMRO Bank. São Paulo, May 2007

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1 Translatinas Pursuing Intraregional Opportunities Carlos Braga Executive Director ABN AMRO Bank São Paulo, May 2007

2 Summary The regional expansion of the LATAM companies has been an important phenomenon of the last decade Why are Translatinas expanding abroad? Risk diversification versus market seeking Latin America: Different realities within the same region The direct investments done by the Translatinas outside of their country of origin have accounted for an important part of the FDI flows in LATAM. Translatinas, a lonely Brazilian and Mexican race? Case studies: Examples of Regionalization Translatinas financial needs Conclusion 2

3 Why are Translatinas expanding abroad? Risk Diversification versus Market Seeking Push factors: Competition as a blessing in disguise. Between 1991 and 2001, the ownership of the 500 largest companies in Latin America changed dramatically With non Latin multinational ownership growing to 39% from 27%. The rising global competition pressured local Latin companies. The most ambitious are aiming to compete with the world s largest companies beyond Latin America. However to date only a very happy few local Latin firms have taken on the world or tried to create large multinationals. Investors are welcoming such expansion recognizing the value of combining emerging markets companies with great growth potential with OECD companies with brand recognition and access to large scale markets. OECD Development Centre 3

4 The cost of capital Upon securing top positions at home, some Latin firms started to expand more aggressively abroad. Typically they followed a Translatina cycle: starting to increase exports to neighboring countries; then establishing alliances to obtain access to distribution channels; and subsequently setting up small operations abroad or making acquisitions. But this ultimate stage hard to reach. With the exception of a very happy few (e.g., CVRD, Cemex, Gerdau) translatinas remain heavily constrained by the cost of capital to expand abroad. It is worth to notice that depending on its expansion strategy (i.e., South-South vs. OECD countries) the impact on cost of capital could be significant. For instance, Techint, Gerdau and Votorantim are benefiting from a more OECD-like strategy vs. Petrobras with its South-South approach. OECD Development Centre 4

5 Countries in the region present different realities, in terms of economic and political environment Countries Recent Relevant Events / Description Overall Risk Perception Clear Progress Chile Mexico Colombia Solid macroeconomic fundamentals Advanced level of reforms Institutional and political stability Stronger confidence from international community Already in or close to achieve investment grade Country risk range: bps Regional Dependent Transition Uruguay Paraguay Peru Argentina Venezuela Ecuador Strongly dependent on other large countries in the region (e.g.: Brazil, Argentina, Chile) Some important reforms in recent years Very recently achieved an stable and growing period Recent political or economic crisis Strong dependence of economy in few commodities e.g.: oil Limited structural reforms in recent years and weak institutional environment Note: (1) Not available for Paraguay Source: Interviews with ABN AMRO s economists; Emerging Markets Boards Currently Index JP facing Morgan; populist Booz Allen Analysis governments Risk linked to that of other countries Economy still very dependent on public policies and government Some political and economical vulnerability, and highly depending on next elections results Country risk range: bps (1) Lack of confidence from international community, impacting foreign direct investments Broad uncertainties for future (long term) scenarios i.e.: political, economic and exchange rate risks Country risk range: bps 5

6 The direct investments done by the Translatinas outside of their country of origin have accounted for an important part of the FDI flows in LATAM Brazil Direct Investment Abroad (DIA), (in USD mln) Mexico Argentina Chile Source: CEPAL DIA Flow (left axis) DIA Stock (right axis) 6

7 In 2005, more than 50% of the M&A operations in Latin America have been driven by local firms 7

8 We have seen a major increase of M&A activities sponsored by Translatinas Acquisitions in LatAm by LatAm companies from USD mln Including internal market Excluding internal market Brazil Mexico Chile Argentina Colombia Others Total OECD Development Centre 8

9 Significant increase of South-South FDI flows past 5 years USD bln South-South FDI on the rise Total FDI inflows South - South FDI Source: Global Development Finance, 2006 OECD Development Centre 9

10 The emerging Translatinas: A lonely Brazilian and Mexican race? Number of firms in Forbes 2000 Number of firms in Forbes The 50 more profitable firms China India Brazil Mexico Chile Brazil Mexico Chile Argentina Colombia Ecuador Panama Peru Venezuela Source: Forbes The world s 2000 largest public companies, 2007 Source: America Economia 2005 OECD Development Centre 10

11 Brazilian Firms have started to expand overseas: Global or Pure Regional players? Top 100 firms in Latin-America Brazil Mexico Chile Argentina Ecuador Colombia Peru Venezuela Source: America Economia 2005 OECD Development Centre 11

12 Translatinas are spread out in the whole region Mexico Bimbo Vitro Mabe Femsa Cemex Xignux Del Valle Grupo Nacional de Chocolate Carvajal Organización Corona ISA Centelsa Grupo Argos Ecopetrol Grupo Team Falabella Endesa Terranova Masisa Ripley CMPC Enap Lan Arlineas Madeco Alicorp Grupo Gloria Colombia Ecuador / Peru Celulosa Arauco Comercial Corza Grupo Ultragas SPL Cencosud Crodelco Corbanca Farmacioas Ahumada * HQ Headquarters Subs - Subsidiaries Chile Argentina Venezuela Paraguay Uruguay Brazil Grupo Polar PDVSA Gerdau Petrobras Bertin Technint Marfrig Arcor Petro. Comod. Rivadavia Bunge Sullair Const. Norberto Odebrecht Const. Andrade Gutierrez Banco do Brasil Camargo Correa Votorantim Magnesita Imbev Natura Itausa Marcopolo Coteminas Friboi 12

13 Brazilian Presence in Latin America Mexico Usiminas Localiza Unigel Ultra Gol Colombia Gerdau Petrobras Vicunha Ecuador Localiza Andrade Gutierrez Peru CVRD Andrade Gutierrez Venezuela Andrade Gutierrez Usiminas Petrobras CVRD/Braskem Paraguay Localiza Bolivia Localiza Petrobras Chile CVRD Localiza Gerdau Argentina Acesita Belgo/Arcelor Gerdau Usiminas Localiza Coteminas CVRD Uruguay Localiza Belog/Arcelor Gerdau Petrobras 13

14 Example of Regionalization: Brewers (Kaiser) 2004 SAB Miller 2005 Inbev 2002 Ambev 14

15 Example of Regionalization: Soft-drinks 15

16 Translatinas financial needs The identified needs of these intra-regional companies are: Advisory in the countries where they are newcomers or intend to penetrate. To seek for new business opportunities in the countries where they perceive a potential expansion (M&A, Acquisition Finance, Project Finance). The requirement to develop centralized treasuries to optimize funding and transactional costs across the region. Tailored hedging structures including all currencies from the region Insure itself against political risks (i.e., expropriation, convertibility, war and political stresses). 16

17 Sample of Financial Services offered by international banks in Latin America Capital Markets Cross Border and Local Currency Fixed Income International and local Syndicated Loans Liability Management Structured Products - ECA s Derivatives: Cross Currency Swaps, Options, LT interest rate derivatives Investment Management Products Investment Banking M&A & Advisory Strategic initiatives Equity capital markets Financial Engineering Distressed Asset Investments Commercial Banking Services Cash management and payments Liquidity management Trade services Trade finance Global and local custody (Brazil) Local Currency Loans USD ST and LT Loans 17

18 Conclusions There are a number of opportunities for regional companies such as mergers, acquisitions, IPOs, alliances and expansion in Latin America. The main challenge from a CFO s point of view is to be able to have financial partners with capacity to offer customized financial services on a regional and/or global scale. Few banks and insurance companies are focused on developing products and provide support to such emerging multinationals. Translatinas are a phenomena that is here to stay, which provides an unique opportunity for services providers (i.e., logistics, audit, consulting, legal companies) to adapt themselves to offer a customized product offering. 18

19 ABN AMRO in Latin America Strong Regional Footprint Brazil is the 3 rd home market for ABN AMRO after The Netherlands and the US. Mexico Wholesale Banking Venezuela Wholesale Banking - 1of the 4 Int l banks with full branch Our regional presence provides local support to our international clients while maintaining a global perspective of each client. ABN AMRO complements its strong presence in Latin America by partnering with local institutions throughout the region. Commercial Bank Consumer & Commercial Clients * Partnership with local banks Colombia Wholesale Banking- - 4 Payment & Collections Centers in major cities Peru Presence through partnerships with Banco Wiese Chile Wholesale Banking Argentina Wholesale Banking - Present since 1914 Brazil Consumer & Commercial Banking 1st foreign bank by deposits and 2nd largest foreign bank by total assets. Paraguay Consumer & Commercial Banking - largest bank employees - 15 branches Uruguay Consumer & Commercial Banking - largest private bank employees - 23 branches 19

20 Curriculum Vitae Carlos Braga is the Commercial Client Segment head for the Spanish Speaking Latin America. Responsibilities include the coordination of the regional coverage in Argentina, Chile, Colombia, Venezuela, Ecuador and Mexico. He brings to ABN AMRO s customers a diversified background as Head of Financial Markets Latin America Business Unit ( ), Head of Loan Products Latin America group ( ). Prior to this posting Mr. Braga held several postings in the product & corporate bank areas of ABN AMRO in Brazil and US. Mr. Braga joined ABN AMRO Bank in Mr. Braga received his Degree in International Trade Management from UCLA and his MBA from the Instituto Brasileiro de Mercado de Capitais (IBMEC), Rio de Janeiro. Mr. Braga also has a Degree in Economics from Faculdade Candido Mendes and a Management Corporate Resources Degree from IMD in Switzerland. CARLOS BRAGA CARLOS BRAGA Executive Director Commercial Executive Director Client Segment HeadSSC Latin America Commercial Client Segment HeadSSC Latin America Tel.: fax.: Tel.: fax.: carlos.braga@br.abnamro.com carlos.braga@br.abnamro.com

FOREIGN INVESTMENT IN LATIN AMERICA AND THE CARIBBEAN 2004 REPORT. Presentation by Mr. José Luis Machinea, Executive Secretary of ECLAC

FOREIGN INVESTMENT IN LATIN AMERICA AND THE CARIBBEAN 2004 REPORT Presentation by Mr. José Luis Machinea, Executive Secretary of ECLAC Santiago, Chile, 15 March 2005 TOPICS COVERED IN THE 2004 REPORT 1.