Brazil Discovers the World of Open Capital and Is Making Money

Brazil's beverage company Ambev one of the most profitableThe number of Brazilian companies that opened their capital between 2004 and March this year has reached 50. It is a very expressive datum, given the fact that very few processes of this type happened in previous years: there was just one a year in 2000, 2001 and 2002 and none in 2003.

"And during the entire 1990s, only six or seven companies opened their capital," said the company relations superintendent at the São Paulo Stock Exchange (Bovespa), João Batista Fraga.

According to Fraga, the figures reveal a trend that is cause for enthusiasm, because on the one hand they show that an increasing number of investors is seeking to do more business, and on the other hand, they show that companies are more interested in capturing funds in the capital market. "The market is playing its role, working the way it should work," Fraga said.

These motions resulted in a "virtuous circle", with shareholders showing increased interested in the actual businesses of companies, better share pricing, and increased issuing of bonds by companies. The possibility of obtaining funds in a more flexible manner, according to Fraga, leads some companies to invest and make acquisitions that they otherwise would not make.

Until recently, though, things were different. Changes in the segment started taking place in 1999, when the stock exchange diagnosed that, in general, "more sophisticated" investors were aware that the Brazilian capital market had low quality because the rules in effect did not ensure several shareholder rights.

From then on, different market levels were created, and in order to belong in the next level, companies are forced to raise their corporate governance standards, to create a more balanced environment regarding share management, and to provide company information with more transparency.

The highest level is New Market ("Novo Mercado"), followed by Level 2 and Level 1 and, finally there is the traditional stock exchange. The higher the standard, the higher the requirements.

Thus, companies that choose these stricter models are not as prone to being affected by oscillations caused by companies with a poorer corporate profile, they will not go down along with everyone else.

Proof of that is the fact that Bovespa created an exclusive index for those companies, the Corporate Governance Index (IGC). Last year, the IGC appreciated by 41.3%, against 32.9% for Ibovespa, which is the main index in the Brazilian Stock Exchange, and is comprised of shares of companies in different levels.


According to Bovespa, the companies that open their capital now are already entering the New Market. This is the case with Cosan, the largest company in the Brazilian sugar and alcohol sector, which entered the stock exchange in 2005. The company obtained 885 million reais (US$ 429,5 million) by issuing shares, an amount that was invested in the acquisition of three new industrial units.

Currently, according to Fraga, more than 20 companies in Brazil are in the process of opening their capital. One of these companies, also in the agribusiness sector, is JBS, owner of the Friboi slaughterhouse, the country’s largest. This month, the company presented a preliminary prospect for a public offering of its shares in the value of 2.2 billion reais (US$ 1 billion). This is a traditionally closed sector, which is now opening up to the stock market.

On the other hand, 52 companies that used to belong in the traditional stock exchange have migrated to the highest levels. One such example is that of Embraer, an airplane manufacturer, which is now part of the New Market. The possibility of attracting funds for investment under more favorable conditions was one of the factors that led the company to make this decision.

"The features of Embraer’s business requires, with every product launch, to have access to the capital market, in order to capture funds at more competitive rates," said the director of capital markets at the company, Anna Cecília Bettencourt. "In the previous model, there was a limit in the capital structure for accessing the stock market, of two thirds for preferred shares and one third for ordinary shares," she said.


In order to enter the New Market, a company must voluntarily comply with a series of requirements regarding management and transparency, which are much stricter than those of the Brazilian law, including a prohibition to issuing preferred shares, whose owners do not have voting rights.

Embraer converted all its shares into ordinary ones, and floated its capital. In other words, theoretically, the company no longer has a controlling group. Levels 2 and 1 also have stricter requirements than those of the law, but not as strict as those of the New Market level.

"Embraer is a global company, it needed a new corporate profile," Anna Cecília said. Before the process, which began in January and was concluded in June last year, the company was controlled by pension funds Sistel and Previ, and by Grupo Bozano. The first two sold part of their shares and the social statute was changed, in order not to allow a single shareholder to have more than 5% of voting rights, even if it owns a larger share of the capital.

This, according to Anna Cecília, provided the company with greater flexibility to access the capital market and to finance its projects. According to Fraga, the lion’s share of funds obtained from secondary bond issuances are used by companies in investments and acquisitions. In secondary issuances, the money becomes part of the company cash reserves, and in primary issuances, it goes to the company controllers. The two can happen simultaneously.

Embraer, though, has not used this mode of obtaining resources yet. "This was not conceived to take place in the short run," Anna Cecília said. The idea is to eventually issue bonds when the company needs to invest. And its investment plan is an ambitious one, as it forecasts investments of US$ 2.6 billion in five years, the hiring of 3,000 employees this year, and the launch of new aircrafts.

Nevertheless, even though not directly linked to the opening of the capital, the company recorded some positive facts since the operation was announced, such as the value of its shares, which rose from 18 reais (US$ 8.74 at current exchange rates) at the end of 2005 to 22.90 reais (US$ 11.12) after the announcement.

Besides, with the floating of capital and the attainment of the so-called "investment grade" with international consultancy companies, Embraer has managed to capture funds at lower interest rates and longer deadlines in the financial market.

"We made our first capturing of funds after 10 years, worth US$ 400 million, at an yearly interest rate of 6.37%, which is quite attractive. Besides, the average deadline for maturity has almost doubled," Anna Cecília claimed. "But it is hard to measure the impact of the restructuring right now," she said.

In total, 13 open companies currently have their capital floating, according to Bovespa. In addition to Embraer, also in the list are American Banknote, in the printing sector, BrasilAgro, which operates in the agricultural real estate market, Dasa, clinical diagnoses, Datasul, information technology, Eternit, construction material, Gafisa, real estate development, Lojas Renner, retail, Lupatech, a maker of mechanical products, Perdigão, in the food industry, construction company Rossi Residencial, Submarino, an online retail store, and Totvs, a producer of software. Eternit and Renner, though, are the only two companies with 100% floating capital, i.e., all their shares are in the stock market.

11% Growth in Profit

The total profit of the 20 greatest Brazilian open-capital companies reached 84.8 billion reais (US$ 41.1 billion) in 2006, an increase of 11.2% when compared to the 76.23 billion reais (US$ 36.9 billion) reached by the same companies in 2005. According to the coordinator of consultancy company Economática Latin America, Einar Rivero, who compiled the figures, this is the fourth year running in which there is expressive growth in profits.

The list is composed of companies in the areas of oil, mining, banking, ironworks, telecommunications, beverages, pulp and paper and electric energy. "The list is headed by great exporters of commodities, whose profits were obtained due to high prices abroad," stated Rivero. Petrobras was in first place, with net profit of almost R$ 26 billion (US$ 12.6 billion), followed by Vale do Rio Doce mining company, the second largest mining company in the world, with R$ 13.4 billion (US$ 6.5 billion).

The Petrobras profit, according to Rivero, was the greatest in Latin America among open-capital companies and the Vale profit was the greatest among private companies. The oil company has mixed capital and is controlled by the Brazilian government.

The Bank of Brazil, Bradesco and Itaú banks follow. Unibanco bank also appears in the list, in the 12th position. Not all financial institutions, however, posted increases in their profits. Bradesco’s profits, for example, fell 8.3% to little over 5 billion reais.

The Itaú profit dropped 18%, to 4.3 billion reais (US$ 2.1 billion), but Holding Itausa, which controls all the companies in the group, registered 95.3% growth in profit, to almost 4.5 billion reais (US$ 2.2 billion). The value obtained by Unibanco was also smaller, 1.75 billion reais (US$ 849 million), 4.8% less than in 2005.

Among the banking institutions, according to Rivero, with the 2006 results the Bank of Brazil (BB) figures as the largest bank in Latin America, whereas Bradesco is the largest among the private banks. Like Petrobras, BB is a mixed-capital company, controlled by the state.

Other companies that have great demand abroad also figure in the group, as is the case with Ambev, a beverage maker that has operations outside the country and had profits of 2.8 billion reais (US$ 1.36 billion) in 2006, and ironworks like Gerdau, Usiminas, Arcelor BR and Gerdau Metalúrgica. Another company in a sector that is a great exporter is Aracruz, in the pulp and paper sector.

In the area of services come telecommunications companies like Telesp (Telefônica), Telemar Norte Leste and Telemar NL Participações, as well as electric energy companies like Cemig, CPFL Energia, Neoenergia and Tractebel. The profits of energy companies, in Rivero’s evaluation, comes from tariff policies and growing demand.

Another factor that helped generate income to companies in 2006, according to the consultant, was the depreciation of the dollar against the Brazilian real. Although that affects exports as it makes Brazilian products more expensive abroad, a good share of company debts are in foreign currencies. That is, the cheaper dollar means lower debts in Brazilian reais.

The companies that posted the greatest growth in profit were Itausa (95.3%), Ambev (81.6%), Bank of Brazil (45.5%), CPFL Energia (37.5%), Vale do Rio Doce (28.6%), Neoenergia (21%) and Telemar NL Participações (17.6%).

"Brazil is well positioned, we are competing with Mexico," stated Rivero. He pointed out, however, that the greatest open capital companies represent just a small share of the companies existing in the country and that the results could be even better with the adoption of more policies to stimulate the economy. "We are gaining one or two sweets, whereas we could be gaining a packet," he said.

Anba –


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