BY JOACHIM BAMRUD
Although some investors are expressing growing concern about the state role in Brazil, the South American country appears unstoppable in boosting local and foreign investment.
Last week oil giant Petrobras, Latin America’s largest company by revenues and profits, made world history when it raised $70 billion in a share sale.
It was the largest share offer anywhere so far and twice as big as the largest M&A deal in Latin America the past five years, the $35.3 billion merger of America Telecom with America Movil in 2006. It was also almost as much as all M&A deals in Brazil last year, which totaled $72 billion, according to Thomson Reuters.
The share sale catapulted Petrobras to become the fourth-biggest company in the world in market capitalization, according to Bloomberg. Petrobras’s market value of $214 billion ranks only behind Exxon Mobil Corp., Apple Inc. and PetroChina Co. and ahead of companies like Microsoft Corp. and Wal-Mart Stores Inc.
Meanwhile, the BM&F BOVESPA stock exchange has become the second largest in the world in terms of market capitalization, it announced. Its market value of $ 17.7 billion is 25 percent higher than New York and London Exchanges and Nasdaq combined.
“It is with great pride that, from a truly Brazilian Exchange, we can tell the world that not in New York, not in Paris, but in São Paulo, at our Exchange, we carried out the biggest offering in history,” Brazilian President Luiz Inácio Lula da Silva said at Bovespa on Friday.
The sale comes as two new surveys show Brazil as one of the leading investment targets in the world. On September 21, Bloomberg revealed that a new survey among 1,408 investors, analysts and traders showed Brazil as the preferred place to invest. The United States had held that spot in the previous survey three months ago.
A few weeks earlier, a report from the United Nations Conference on Trade and Development (UNCTAD) showed that Brazil ranked third in terms of foreign direct investment plans the next two years. That ranked it behind China and India, but ahead of the previous number two, the United States.
Brazil’s economy is set to grow by more than 7 percent this year, according to both government officials and private sector economists. That will further cement Brazil as the region’s top economy and one of the 10th-largest in the world. As late as six years ago, Brazil’s economy ranked second in Latin America after Mexico.
All this as Brazil is holding a presidential election -- on Sunday, October 3. Although the investor favorite, Jose Serra, is trailing the official candidate Dilma Rousseff, foreign investors are bullish about Brazil’s outlook because they see no radical changes on the horizon.
Rousseff is expected to continue the economic policies of Luiz Inácio Lula da Silva, who will leave office in January after eight years. Her key economic advisor is Antonio Palocci, who won widespread praise from investors when he served as Lula’s first finance minister. Meanwhile, Luciano Coutinho – the president of development bank BNDES – is widely seen as her likely finance minister is central bank governor.
Coutinho is also widely respected, even among supporters of Serra. He was just named Financier of the Year by Latin Trade magazine.
Brazilian companies like Vale and Gerdau are selling a record $8.7 billion of international bonds this month in a sign investors are confident that Rousseff will continue Lula’s economic policies, Bloomberg reported today.
Funds raised from the share sale will be used by Petrobras to help finance its ambitous $224-billion business plan, including investment in the huge Tupi pre-salt field, points out HIS Global Insight.
However, the Petrobras share sale is not without controversy. Many investors were unhappy with the delay of the sale, which was caused by infighting between Petrobras management and the Lula administration. The delay had sent Petrobras stocks tumbling and losses of $70 billion in market capitalization in recent weeks.
Then there’s the fact that the sale included the Brazilian government’s purchase of shares, boosting its stake from 40 to 48 percent. That marks a “reverse privatization” of Petrobras, which lost its state monopoly in 1997 and later started selling shares to Brazilian and foreign investors.
“The news that the government has increased its stake, although to be expected, will result in continuing concerns over the potential for greater state intervention in the company's operations, especially as the likely winner of next month's presidential election—the former Minister of Mines and Energy and ex-Chief of Staff, Dilma Rousseff—supports a strong state role in strategic sectors of the economy,” IHS Global Insight says in a commentary today.
And some experts, like Templeton’s Mark Mobius, says the sales record was not the result of Petrobras’ true value, but rather a potential bubble. "The entire Petrobras issue is an abomination and a terrible violation of shareholder rights," Mark Mobius, who oversees $34 billion as executive chairman of Templeton Asset Management, told Bloomberg. "We may be entering an IPO bubble. It means that people are just not looking at the values and irrationally buying these things."
Sovereign wealth funds from the Middle East and Asia were among the investors buying into the offering, which also had "tremendous demand" from U.S. mutual funds, according to Reuters.
Despite the growing state meddling and ownership, Petrobras is considered a well-run company, especially when compared to its oil peers in Latin America, Mexico’s Pemex and Venezuela’s PDVSA.
Petrobras last year increased revenues by 14 percent to $104.9 billion, while profits grew 17.9 percent to $16.6 billion. That ranked Petrobras as the top Latin American company in revenues, ahead of Pemex, with $83.4 billion. It also ranked Petrobras as the most profitable company in the region, beating number two, Telefonica, which posted $7.7 billion in Latin America profits. Pemex managed to post losses of $7.2 billion last year. Meanwhile, PDVSA saw revenues fall 41 percent to $75 billion last year, while profits fell 53 percent to $4.4 billion, according to its annual report.
Petrobras may sell further shares to meet the demand. The sale last week had a total demand of $87 billion, according to Reuters.
Meanwhile, Brazil is gearing up for the 2014 World Cup in soccer and 2016 Olympics in Rio de Janeiro, which will require significant investments in infrastructure. Some estimates put those as high as $30 billion.
Despite continued challenges such as cumbersome tax regulations and inefficient infrastructure, Brazil is clearly on a roll, with a very sunny outlook, indeed.
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