Brazil Says Any Oi-TIM Deal Would Be Studied Closely

The Brazilian government would study any potential merger or acquisition agreement between telephone companies Oi SA and TIM Participações SA closely to avoid too much concentration in the sector, Communications Minister André Figueiredo said Tuesday.Oi announced Monday that LetterOne, an investment firm led by Russian billionaire Mikhail Fridman, is planning to invest $4 billion in the Brazilian phone company. The offer is conditioned on the success of a potential merger with TIM Participações SA, the Brazilian unit of Telecom Italia SpA, Oi said. TIM Participações said Monday that there are no talks with LetterOne or Oi about a possible merger or acquisition.

“The Brazilian government will follow with attention the case announced by Oi about TIM,” Mr. Figueiredo said at a conference. “We’ll only comment when we’ve been formally informed by the company.”

Oi has 35% of Brazil’s fixed-line telephone market, but it fell behind rivals in the mobile race and has been trying to make up ground while cutting its heavy debt load. Mobile operator TIM doesn’t have a relevant position in the fixed-phone and broadband markets, according to analysts.

Later, at the same conference, Telecom Italia Chief Executive Officer Marco Patuano said a combination of TIM Participações with Oi would be “one of the options,” but added that all the telecom companies in Brazil are in need of more investment.

In the second quarter, the most-recent figure available, Oi’s net debt totaled 34.64 billion reais (about $8.9 billion), while its net revenue in the period totaled 6.78 billion reais.

When asked about Oi’s debt level, Mr. Figueiredo said the government might help the company if necessary.

“Nothing has been ruled out,” he said. “We know how important Oi is, though that doesn’t necessarily mean the government will inject cash directly into the company.”

Meanwhile, Oi said that it is working to improve its performance.

“We are engaged in the improvement of our balance sheet and in the improvement of our debt profile, in order to prepare the company to participate in the consolidation process of the telecom industry in Brazil,” said Oi CEO Bayard Gontijo to The Wall Street Journal, before his participation in an event in São Paulo.

Shares of Oi and TIM Participações fell mid-Tuesday, after being the Ibovespa stocks index’s biggest and second-biggest gainers, respectively, on Monday. Oi recently was down 3.7%, to 3.37 reais, and TIM Participações was down 8.2%, to 7.87 reais. The Ibovespa was down 0.7%.

New investments signal turnaround in Brazil ethanol industry

Improved returns from sales at home and abroad are unleashing the first major flurry of investment in Brazil’s struggling ethanol industry in nearly a decade, with at least nine companies expanding or building new capacity.

Medium-sized private mill Rio Verde said it would double ethanol output over the next two years to capture resurgent biofuel demand.

Cargill and Odebrecht are the biggest of at least eight other companies investing in expansion in the past months, even as Latin America’s largest economy sinks deeper into its worst recession in over a decade.

The real’s collapse has improved Brazilian ethanol’s edge abroad, and recent increases in refinery-gate prices by state-run oil company Petrobras and taxes on gasoline have boosted domestic demand for the biofuel to record levels.

Once completed, Rio Verde’s expanded output will account for only a small portion of Brazil’s total capacity, but this and the other projects are the strongest sign yet that ethanol has turned a corner after government subsidies of gasoline prices could no longer be sustained. 

“The outlook for ethanol has brightened, even as the broader economy looks more difficult,” said Luis Galan, operations manager at the Rio Verde mill in Goias state.

Earlier this year, Rio Verde started commissioning its new ethanol unit, which will produce 180,000 liters (47,500 gallons) a day, in addition to its current 300,000 ltr/d output. Another 190,000 ltr/d will come in the second phase in 2016 or 2017.

The total 670,000 ltr/d comes to 0.5 percent of Brazil’s capacity of 115 million ltr/d.

To be sure, many of Brazil’s 360 mills are in no position to start building new plants as they struggle with stifling debt accumulated over the past decade. Many are still skeptical that the government has abandoned its practice of suppressing fuel prices to curb inflation, which helped drive nearly 80 mills out of business in the past several years.

But the government is quickly running out of ways to replace falling revenues in the deepening economic downturn. This makes additional tax increases on gasoline more likely, which would further strengthen ethanol’s advantage at the pump.

“The sector is finally turning around,” said Alexandre Figliolino, head of agribusiness at investment bank Itau BBA.

Mikhail Fridman Proposes $4 Billion Investment in Oi of Brazil

The Russian oligarch Mikhail Fridman may spend as much as $4 billion to expand his telecommunication holdings into South America.On Monday, the Brazilian telecommunications company Oi said that Mr. Fridman’s investment group, LetterOne, had given it a proposal to invest in a possible merger of Oi with Telecom Italia’s local operator, TIM Participações.

“In accordance with LetterOne’s proposal, sent by BTG Pactual to Oi’s management and board, LetterOne would be willing to invest as much as $4 billion in Oi, conditioned on the operation of consolidation (with TIM),” Oi said in a statement. The company said that it would “analyze” the offer.

Because Oi’s market value is about $650 million, Mr. Fridman’s investment would presumably give him control of Oi’s stake in any merged company, but Oi’s statement also said that any deal “would not represent an economic dilution of shareholders.”

Mr. Fridman became one of the world’s richest men after selling his stake in joint oil venture TNK-BP to Rosneft in 2013 . He also recently sold energy assets in Britain.

Through LetterOne Mr. Fridman already own stakes in two telecom companies: VimpelCom, based in Amsterdam, and Turkcell in Turkey. LetterOne said in April that it was planning to spend up to $16 billion on telecom acquisitions.

Oi hired the Brazilian investment bank BTG Pactual last year to look for a way to merge with TIM Participações. At the time, BTG stitched together a $14 billion deal in which Oi would have joined forces with Telefónica of Spain and América Móvil of Mexico to carve up TIM Participações, but the deal fell through as Telecom Italia decided to maintain its presence in Brazil.

Since then, Brazil’s economy and TIM Participações’ business model have deteriorated.

The company’s revenue is falling, its cash flow is negative, and it has lost about a third of its value on the São Paulo stock exchange over the last year.

For Oi, Mr. Fridman’s cash might be a way out of a mountain of debt.

The company, saddled with a merger with Portugal Telecom, has $13 billion in gross debt and this year had to request a waiver on loan covenants with its banks.

But it is far from certain that Mr. Fridman’s offer will indeed lead to a merger.

Jonathan Dann, telecommunications analyst with RBC Capital Markets in London, said that even though a merger between Oi and TIM Participações would have an “industry logic,” it was not clear how a deal could simultaneously reduce Oi’s debt, keep Oi’s shareholders from suffering dilution and meet Telecom Italia’s likely need for either a large cash payment or control of the new company.

“This will be a very challenging deal to structure,” Mr. Dann said.

In statement, TIM Participações said that no negotiations were currently underway with either Oi or LetterOne about a possible merger.

Foreign investment in Brazil grows in September, covers external gap

Brazil’s current account deficit grew wider than expected in September but was easily covered by foreign investments, central bank data showed on Friday. 

Brazil posted a current account deficit of $3.076 billion in September, larger than a gap of $2.487 billion in August and the $2.3 billion deficit forecast by economists for the month, central bank data showed on Friday. 

Brazil attracted $6.037 billion in foreign direct investments last month, up from $5.246 billion in August, the central bank said. 

Despite the monthly increase, the current account deficit declined as a percentage of Brazil’s gross domestic product in the 12 months through September. It was equivalent to 4.18 percent of GDP, down from 4.34 percent in the previous month. 

A weaker Brazilian real is helping exporters and curbing imports, boosting the country’s trade balance after the country recorded its first deficit in 14 years in 2014. 

Brazil’s currency dropped more than 30 percent this year to a record low of more than 4 per dollar as investors fret over a steep rise of the country’s debt. 

Brazil Bull Who Got It Right in 2002 Says This Time No Different

The selloff punishing Brazilian markets in recent months isn’t fazing Jerome Booth. He’s seen it before and says just like then, it’s way overdone.Yes, Brazil has serious problems. The country’s “a mess,” he says, with a massive corruption investigation at state-run oil company Petroleo Brasileiro SA, a worsening fiscal outlook, the steepest recession in 25 years and a political system so fractured that needed reforms just aren’t getting done. That’s not to mention a credit-rating cut to junk and the currency’s plummet to a record low.

But there’s no chance the government is going to default, and politicians eventually will find the will to push through measures to shore up the budget and restore growth, Booth said in an interview in New York. The panic among investors is excessive, just like 13 years ago when bond prices collapsed along with the currency amid concern the front-runner in presidential elections would repudiate the government’s debt, said Booth. He was then head of research for Ashmore Investment Management, at the time one of the biggest dedicated emerging-market sovereign bond holders.

“You’ve got the classic ‘everything’s as bad as it can possibly be’” situation, said Booth, the chairman of New Sparta Asset Management, an investment company he started after leaving Ashmore in 2013. “But it’s all priced in now.”

Brazil’s overseas bonds are close to reaching bottom, according to Booth, after losing investors 8.3 percent this year. Only Zambia has posted worse returns among more than 60 emerging-market countries tracked by JPMorgan Chase & Co. indexes. Brazil’s currency, which gained 0.7 percent Monday as of 2:03 p.m. in New York, is still down 32 percent against the dollar this year, the most among major emerging markets.

After three sovereign rating cuts in the past three months, one of which cost Brazil its investment-grade rating, the government will put a “proper economic program” in place and restore investor confidence, Booth said.

“I would think it’s months rather than a year,” he predicted.

What makes Booth confident even as shops from BlackRock Inc. to Federated Investors Inc. and RBC Capital Markets see reasons to avoid Brazil?

Because he thinks most investors have overestimated the risk, just like in 2002. Back then, a selloff hit ahead of the presidential election as Luiz Inacio Lula da Silva gained in the polls. The concern was that the former union leader and founder of the Workers’ Party would declare Brazil’s debt illegitimate. Observers worried the country was slipping backward just a decade after shaking off a legacy of hyperinflation and political instability to become one of the world’s brightest stars among developing nations.

The real plunged to a record low, average yields on the country’s bonds soared to more than 25 percent and the benchmark stock gauge tumbled 40 percent ahead of the vote.

“The hedge funds at that point had this view that there’s a thing called a self-fulfilling prophecy,” Booth said. “They knew one thing: If all their peers in New York were negative,” then Brazil “would fall over. I thought that was just nonsense.”

In fact, when Lula won, investors were rewarded. From his inauguration at the start of 2003 until he left office at the end of 2010, Brazil’s dollar-denominated bonds returned 256 percent, more than double the emerging-market average. Real-denominated notes advanced 520 percent in dollar terms, almost three times the average for peers. The currency more than doubled in value against the dollar, and stocks surged 500 percent.

While Booth had money at stake when he made his call in 2002, this time around he’s not investing in Brazil’s markets. After leaving Ashmore in May 2013, he established London-based New Sparta, through which he manages investments in U.K. phone company New Call Telecom and a magazine publisher, among other businesses. New Sparta funded the Drew Barrymore comedy “Miss You Already,” which premiered at the Toronto International Film Festival last month.

Still, from his vantage point, Booth says investors are too worried about developing countries. Emerging-market assets have dropped for most of this year amid concerns the Federal Reserve will raise rates and as the Chinese economy shows signs of deceleration.

“1998 was the last time when you had a systemic crisis which could have led to serial defaults over emerging markets,” Booth said. “We haven’t had that, and we’re not likely to have that again.”

World Bank to help Brazil pilot new infrastructure financing project

Brazil is launching a new “Project Bond” model, developed by the World Bank

Brazil is launching a new “Project Bond” model, developed by the World Bank (WB) at the request of the country’s government, with the aim of increasing the role of capital market in financing infrastructure projects.

“We expect this new product to help attract private sector financing into our infrastructure sector and leverage the financing provided by other sources, such as our national development bank,” Brazil’s Minister of Finance Joaquim Levy said as quoted in a Friday WB release.

According to the World Bank, the project will open new opportunities for domestic and international investors in Brazil by creating a new asset class for infrastructure investments.

“The relatively low risk of the instrument, the attractive yields, and the potential liquidity created by the presence of domestic institutional investors will help attract international investors to this market,” World Bank Vice-President for Latin America and the Caribbean Jorge Familiar said as quoted in the WB release.

According to the statement, the bond design, expected to be piloted in the coming months, could be used for future infrastructure financing projects in other countries.

“The World Bank is ready to consider supporting the pilot issue with new financial commitments of up to USD 500m,” the WB release said, adding that the project is open to the participation of other international financial institutions.

Brazil has been trying to get more foreign investors to participate in its infrastructure projects, in an effort to give a boost to the economy.

In June, the Brazilian government unveiled a new package of infrastructure projects, including roads, railways, ports and airports, with an estimated total cost of around $64 billion.

According to Brazil’s Minister of Planning Nelson Barbosa, the infrastructure plan, a third of which should be implemented by 2018, could help Brazil’s economy grow at a 3 percent annual rate.

The current investment rate in Brazil’s economy is less than 20 percent of the country’s GDP (gross domestic product), according to Barbosa.

CADE Approves Merger of TOTVS and Bematech

TOTVS S.A. (BM&FBOVESPA: TOTS3) (“TOTVS”) and BEMATECH S.A. (BM&FBOVESPA: BEMA3) (“Bematech”), in addition to what was informed by the companies on August 20, 2015 and September 03, 2015, hereby jointly announce that, on this date, the decision of CADE’s General Superintendence, approving the merger of Bematech’s shares by Makira II Empreendimentos e Participações S.A. (“Makira II”), and the subsequent merger of Makira II by TOTVS, was published, as detailed in the announcements previously made and in the other documents mentioned thereunder. Once the legal term of 15 (fifteen) daysfor the call-back (avocação) of the decision by CADE’s Court elapses with no objection to that decision, the companies will make a new announcement, with the guidelines regarding the procedures for the satisfaction of the transaction.

Travelers Buys Majority Stake in J. Malucelli to Grow in Brazil

The property casualty business, in which Travelers is now 95% stakeholder, will operate under the Travelers brand. The business will now focus on property, general liability, construction and financial insurance products. The company expects to serve its customers with enhanced and expanded product and services and hence capitalize on the opportunities in the Brazilian market offers.The remaining 5% will be owned by Paraná Banco, the parent company of J. Malucelli. Travelers will retain the 49.5% stake in the surety business of the J. Malucelli.

In Dec 2012, Travelers had made a similar attempt by increasing its stake in J. Malucelli Participações to 49.5% from 43.4%.

The acquisition bears testimony to Travelers’ prudent investment strategy, wherein it strives to expand in the attractive and growing market place outside the United States. Recently, the company, in a joint venture with J. Malucelli, acquired a majority stake in Columbia-based surety provider Cardinal Compañía de Seguros in its effort to build on the surety business there. The acquisition of The Dominion of Canada General Insurance Company by Travelers in Nov 203 is largely contributing to its Financial, Professional & International Insurance segment results.