Thomas White Global Investing
Latin America
Brazil stamp
January 18, 2013
A Postcard from the Americas
Latin America: Europe’s pillar of strength

Handshake

Firms based in Europe, especially Southern European ones, are shaking off pressure at home through various business transactions in Latin America.

Atango or samba with Latin America seems to be what the doctor has ordered for the ailing European economy.

In December, the European Parliament ratified free trade deals with Colombia, Peru, and six other Central American nations. This is the latest evidence of how Europe has been leaning on Latin America for support since the beginning of its difficulties nearly three years ago. Historically, Europe has had deep economic connections with Latin America, starting from the early days of colonization. Right from the time of the so-called “re-conquest” in the 1990s when European companies began investing heavily in Latin America, the European Union (EU) has been Latin America’s second biggest trading partner after the U.S.

Now, companies based in Europe, especially Southern Europe, are shaking off part of the pressure at home through various business transactions in Latin America. Some are divesting their valuable LATAM assets to raise capital to support their struggling businesses at home, while the stronger ones are expanding their LATAM subsidiaries or investing heavily in local firms to capitalize on the significantly better growth opportunities in Latin America.

For instance, Italy’s biggest builder Impregilo is selling its 19% stake in a Brazilian toll-road operator for €765 million, which will enable it to wipe out its debt. The world’s No. 2 retailer by sales, France-based Carrefour sold its Colombian business in October 2012 to raise $2.5 billion.

Many Portuguese and Spanish companies, which initially expanded into Latin America merely for a global presence, are now deepening their footprints. In fact, in 2011, Spain became the second largest European investor in Latin America, pouring nearly $18 billion into LATAM companies. Indeed, Spain’s largest bank Santander is a fine example of how balance sheets are being strengthened by unlocking the value of earlier investments in Latin America. In 2009, Santander famously raised $7 billion by launching the IPO of its Brazilian subsidiary and in October 2012, it filled its coffers with another $4 billion by repeating the move in Mexico.

Similarly, Abengoa, a Spanish engineering and chemical firm that is struggling to pay off heavy bank loans, is raising finances through asset sales in Chile and Peru. Another Spanish construction group Obrascón Huarte Lain has entered into a complex financial deal with Spanish peer Abertis Infraestructuras in an effort to cash in on the value of its Brazilian toll-road subsidiary.

Notably, this debt crisis-inspired spurt in deals and investment is proving to be a win-win situation for both the regions. For instance, the recent free trade deal is expected to not just boost Europe’s export of luxury goods, cars, and chemicals to LATAM economies but also allow countries like Colombia and Peru to increase their export of minerals and farm produce to European nations. The Financial Times has quoted the European Commission as saying that the deal will help EU exporters to LATAM save at least $325 million a year in duties within a decade.

Interestingly, while debt-ridden European companies are selling LATAM businesses to raise cash, Latin American firms are steadily expanding their assets. In 2011, Colombian conglomerate Grupo Saura bought European financial services firm ING’s pension fund management business in several LATAM countries for $3.6 billion. In fact, that year, 5 of the 10 biggest Latin American deals involved the acquisition of businesses from European companies. According to the Financial Times, Mexican companies have been expanding so rapidly that commentators now call it the Mexican ‘reconquista’.

Indeed, rapid globalization over the past two decades has blurred economic boundaries. Today, one country’s weakness is another country’s opportunity, but companies in weak economies are also benefiting from their presence in the stronger ones. Clearly, both European and Latin American firms have understood this well.

 

Image Credit: AK Rockefeller’s photostream on Flickr under a Creative Commons License

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