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Getting to Know Brazil
Brazil Equity Strategy Strategy Comment 23 November 2009
#1 – The poison pill myth
Do poison pills imply high standards of corporate governance? Brazil’s highest level of corporate governance, which requires companies to have only voting shares, with 100% tag-along rights for minorities, is known as the Novo Mercado. Out of the +100 stocks listed in this group, the bylaws of more than 50% of them contain rules aiming to prevent a hostile takeover. The socalled “poison pills” require companies buying a specific number of shares in another company to make a tender offer (at a significant premium to market prices) for 100% of the issuer’s capital. Poison pills (i) may not be valid in M&As, (ii) can be removed… Some investors may think that the implied premium demanded by poison pills represents a potential benefit for shareholders. What many don’t know is that these anti-takeover rules, in many cases, can be easily removed. In other cases, poison pills are not even valid in the event of a transaction involving the company’s controller. Finally, we have recently seen cases in which poison pills (although valid) were not applied, due to the structure used in the M&A transaction. … or (iii) can simply block transactions If not overruled, poison pills may simply block minority holders from increasing their stake in companies or prevent any M&A deal from happening. Poison pills don’t increase a stock’s value We don’t believe poison pills protect minority shareholders’ investment value. If the fundamentals don’t justify a premium price, all else equal, the transactions, as a general rule, simply don’t go ahead. If that’s the case, instead of protecting shareholders by increasing the potential upside of stocks, poison pills may be reason for a discount.
Carlos Sequeira, CFA Analyst firstname.lastname@example.org +55 21 3262 9223 Antonio Junqueira Analyst email@example.com +55 21 3262 9278
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mainly with the aim of preventing minorities from surpassing a specific amount of shares. more than 50% contain poison pills in their bylaws. Corporations are still a rare exception. while GVT has suspended it temporarily. harming operating efficiency and returns. this amount ranges from 10% to 35% of the total capital. putting managers and shareholders on opposite sides. During the IPO season. Brazil. it was value-accretive to buy the company. Considering the list available on the Bovespa’s website and making some adjustments. 25 can be removed by a simple majority if approved by a General Shareholders Meeting. and the trend has posed a threat to many managers’ jobs. like BMF Bovespa. many of the controllers of the companies that went public decided to protect themselves from hostile takeovers (even in cases where they are not yet possible – i. shareholder base dispersion. in our view. the ideal structure. but most of the top 100 . This is. 52 Novo Mercado stocks contain a poison pill clause (see Appendix for a complete list of Novo Mercado companies with poison pill clauses). when over 50% of the shares are held by one single shareholder). changes to local regulations and. With a stockholder base much more disperse than the current Brazilian reality. The clauses and the passive stance of shareholders extended the mandates of inefficient managers across the industry. Cremer has just removed its capital dispersion protection clause. The math was simple. started to see stronger companies are now public. when stocks and the after-tax cost of debt were cheap. which was previously a country with mostly family-controlled companies. Today. since shareholders are able to vote new rules if conditions change. the LBO boom has changed the face of corporate America. A relevant “agency problem” was created. on the political front. The anti-takeover clauses inserted into companies’ bylaws helped contain the huge LBO activity. JBS and Redecard. at the Novo Mercado.e. If the after-tax cost of debt was lower than the company’s earnings yield and the business was a stable cash flow generator. Of these 52 poison pill clauses. on the corporate front. B2W.. Labeled as a ‘capital dispersion protection’ clause. the poison pills were introduced into company’s bylaws. The reaction of executives was to defend. maintaining the status quo for longer. Out of the +100 stocks listed in this group. Poison Pills in Brazil The recent capital market boom in Brazil significantly altered the controlling status of many companies. the US market enjoyed a boom in hostile leveraged buyouts. changes to the companies’ bylaws.Getting to Know Brazil 23 November 2009 page 2 Healthy or poisoned? Back in the 1980s.
The fact that the bylaws of 50% of all Novo Mercado listed stocks feature such measures is not. at the same premium price defined by the poison pill). 122. 121. If that’s the case. but we think that the courts would most likely follow the capital markets regulator. sometimes M&As are able to bypass the poison pill premium. two of the 27. although the poison pill can be removed. a reason to believe the opposite. The CVM’s orientation hasn’t yet been analyzed from a legal standpoint. in our view. then even these bylaws could be altered in order to remove the poison pill clauses. poison pills may be reason for a discount. a complex structure. removing the poison pill clause may appear very difficult.Getting to Know Brazil 23 November 2009 page 3 At the remaining 27 companies. In these cases. the anti-takeover measure is truly treated as a defense against capital concentration. for example. these companies require a supermajority. the bylaws contain a paragraph stating that those voting to remove the clause shall buy the shares of those voting against (in most cases. at the end of the day. Lojas Renner and Positivo. This is the case of DASA. M&As Other issues tone down the importance of poison pills. involving a new holding company. instead of protecting shareholders by increasing the potential upside of the investment. the clauses tend simply to block M&A transactions and minority shareholders from buying more than a specific stake in a company. Poison pills don’t increase (and may even reduce) stocks’ value We don’t think poison pills add corporate governance value to companies. Some clauses are so difficult to be removed that CVM has opposed them In 25 cases. Sometimes. which has more knowledge in such matters. the CVM (Brazilian SEC) has positioned itself against this article. The low caps imposed by these clauses may. Amil and Hering. allow the clause to be removed via a General Shareholders Meeting. If that is the case. However. However. which makes things more complicated. is able to avoid the poison pill. As we believe fundamentals are the main reason behind any relevant investment. stating (via Legal Opinion #36) that the demand on those voting to remove the poison pill opposes specific articles (115. if the prices forced by poison pills are not removed. anti-takeover clauses are not applicable when the controller sells its shares. 129) of Brazilian Corporate Law – the key law governing public companies in the country. As the controllers’ shares are not considered float. reduce demand for the stocks. In other cases. .
. Novo Mercado list as of October 14th 2009 (Bovespa website).Art 45 par 11) no yes (tender . Klabin Segall and Tenda removed from the original list. Nossa Caixa.Art 50 par 10) yes (tender Art 41 par 8) no yes (tender Art 41 par 10) yes (tender Art 41 par 11) yes (tender Art 43 par 10) yes (tender Art 45 par 11) no yes (tender Art 51 par 8) yes (tender Art 38 par 11) no Source: Companies’ bylaws and BTG Pactual.Getting to Know Brazil 23 November 2009 page 4 Appendix Table 1: Details of anti-takeover clauses (poison pills) – Novo Mercado Company Poison Pill existence Triggered at Açúcar Guarani no Agra yes 20% American Banknote yes 20% Amil yes 15% B2W yes 20% Banco do Brasil no Bematech yes 25% BMF Bovespa yes 15% BR Malls no Brasil Agro yes 20% Brasil Brokers yes 20% Brasil Ecodiesel yes 30% Brasil Foods yes 20% Brookfield no CCDI no CCR no Hering yes 20% Providencia no Sabesp no Copasa no Visanet no Cosan no CPFL Energia no CR2 no Cremer removed CSU Cardsystem no Cyrela no CCP yes 15% Dasa yes 15% Drogasil no Duratex no Energias do Brasil no Embraer yes 35% Equatorial no Estácio no Eternit no Even no Eztec yes 15% Fertilizantes Heringer yes 20% Gafisa no General Shopping yes 15% GVT removed Helbor yes 20% Hypermarcas no Ideiasnet yes 25% Iguatemi no Romi yes 15% Inpar yes 20% Invest Tur yes 35% Voting for removal implies any obbligation? yes (tender . Abyara.Art 37 par 13) no. but requires 2/3 approval of total shareholders yes (tender .Art 39 par 11) yes (tender . but requires 75% quorum to remove the poison pill no no no yes (tender .Art 43 par 14) no.Art 39 par 10) yes (tender .
Klabin Segall and Tenda removed from the original list .Getting to Know Brazil 23 November 2009 page 5 Table 2: Details of anti-takeover clauses (poison pills) – Novo Mercado (continuation) Company Iochpe Maxion JBS JHSF Light LLX Localiza Log-in Lojas Renner Lopes Lupatech M. Dias Branco Magnesita Marfrig Marisa Medial Metalfrio Minerva MMX MPX MRV Natura OHL Brasil Odontoprev OGX PDG Porto Seguro Portobello Positivo Informática Profarma Redecard Renar Maçãs Le Lis Blanc Rodobens Rossi São Carlos São Martinho SLC Agrícola Springs Tarpon Tecnisa Tegma Tempo Tivit Totvs Triunfo Tractebel Trisul Weg Poison Pill existence Triggered at yes 15% yes 20% yes 15% no no yes 10% yes 35% yes 20% yes 20% yes 20% yes 10% no no yes 15% yes 20% no yes 20% no no no yes 25% yes 20% yes 15% no no no yes 30% yes 10% yes 20% yes 26% no no yes 15% no yes 25% yes 10% yes 20% yes 20% no yes 20% no yes 20% no yes 20% yes 20% no yes 15% no Voting for removal implies any obbligation? yes (tender Art 48 par 11) no no no yes (tender Art 35 par 12) yes (tender Art 43 par 11) yes (tender Art 35 par 12) no no no no no no no yes (tender Art 39 par 8) no yes (tender Art 32 par 15) yes (tender Art 41 par 11) no yes (tender Art 43 par 10) no no no no yes (tender Art 38 par 14) no yes (tender Art 44 par 14) yes (tender Art 32 par 8) yes (tender Art 45 par 8) Source: Companies’ bylaws and BTG Pactual. Nossa Caixa. Novo Mercado list as of October 14 2009 (Bovespa website). Abyara.
A.A. and/or its affiliates. and is not involved in the acquisition.A. Diagnósticos da América S.A. BM&F Bovespa S..does not hold.. .no part of his or her compensation was.no part of any of the research analyst' compensation was. including in relation to Banco BTG Pactual S. and trading securities held by a research analyst account. . Redecard S. past performance is not a reliable indicator of future results. Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with the NASD and NYSE and therefore are not subject to the restrictions contained in the NASD and NYSE rules on communications with a subject company. . . certifies that: .A.Banco BTG Pactual S. portfolios and investment clubs in securities managed by them) do not own directly or indirectly 1% or more of the total capital of the subject company(ies) JBS S. The figures contained in performance charts refer to the past. is. the listed absolute return requirements must be followed: a) a Buy rated stock must have an expected total return above 15% b) a Neutral rated stock can not have an expected total return below -5% c) a stock with expected total return above 50% must be rated Buy Analyst Certification Each research analyst primarily responsible for the content of this investment research report.A. Coverage1 IB Services2 40% 51% 9% 76% 60% 29% 1: Percentage of companies under coverage globally within the 12-month rating category. CREMER S/A. in whole or in part. Absolute return requirements Besides the abovementioned relative return requirements. as the case may be. related to the specific recommendations or views expressed by that research analyst in the research report. Lojas Renner S. entity or any kind of funds which represents the same interest of the subject companies. Amil Participações. GVT Holding S. in whole or in part. Additional information will be made available upon request. Brazilian Regulation CVM 388 Each research analyst primarily responsible for the content of this investment research report. B2W Companhia Global do Varejo. .. Positivo Informatica SA or are involved in the acquisition..the analyst does not receive compensation for any services rendered or presents any commercial relationships with any of the subject companies or person. public appearances. Expected total return between +10% and -10% the company’s Neutral sector average.. directly or indirectly. including in relation to Banco BTG Pactual S.all of the views expressed accurately reflect his or her personal views about those securities or issuers. and/or its affiliates (including the funds.. alienation or intermediation of such securities in the market.A. and such recommendations were elaborated independently.all of the views expressed accurately reflect his or her personal views about those securities or issuers.A. directly or indirectly securities of the subject companies which represent 5% or more of his or her net worth.A. and such recommendations were elaborated independently. Sell Expected total return 10% below the company’s sector average.no relationship is maintained with any person who works for the subject companies which securities are mentioned on this research. or will be directly or s indirectly related to the pricing of any of the securities issued by any of the subject companies and/or to the specific recommendations or views expressed by the research analyst in this research although part of the analyst' compensation comes from the profits s .Getting to Know Brazil 23 November 2009 page 6 Required Disclosures This report has been prepared by Banco BTG Pactual S. BTG Pactual Definition Rating Buy Expected total return 10% above the company’s sector average.. as the case may be. is. 2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months. or will be. LOJAS HERING S/A.A. certifies that: . alienation or intermediation of such securities in the market. .
1. GVT Holding S. . 4 Amil Participações Positivo Informatica SA Diagnósticos da América S. 4 BM&F Bovespa S. 3. and investment banking services are being. 4. consequently. In addition. 1.A.A.A.A. 4 1. Positivo Informatica SA or person.A has received compensation for products and services other than investment banking services from this company/entity. Amil Participações. 3. makes a market in the securities of this company.A.A. revenues arisen from transactions held by Banco BTG Pactual S. This company/entity is..Banco BTG Pactual S.A.A. 1. 2. a client of Banco BTG Pactual S. but are not limited to. Company Disclosures JBS S. B2W Companhia Global do Varejo. 3..A. GVT Holding S.A. 3. LOJAS HERING S/A. and abrupt potential changes in the cost of capital and economic growth outlook.A.A. Valuations can also be affected by "contagion" from developments in other emerging markets. its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months. and/or its affiliates . or person.A.A. there are potential risks inherent in investing in emerging market countries. the volatile nature of the currency.Getting to Know Brazil 23 November 2009 page 7 of Banco BTG Pactual S. 3.. Potential emerging market related risks include. 4 10 B2W Companhia Global do Varejo 1. and/or its affiliates and. Banco BTG Pactual S.A.A.Banco BTG Pactual S. Lojas Renner S. Banco BTG Pactual S. Banco BTG Pactual S. regulatory and sociopolitical risk. 3. entity or any kind of funds which represents the same interest of subject company(ies) Risk Statement We believe the key risks are additional competition and regulatory issues. 2. 4 1. or have been. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with the subject company(ies) JBS S. Diagnósticos da América S. its affiliates or subsidiaries has received compensation for investment banking services from this company/entity. entity or any kind of funds which represents the same interest of subject company(ies). BM&F Bovespa S. 2.A.. 2.. Banco BTG Pactual S. CREMER S/A. 3. . Within the past 12 months. 10. 2. provided.. Within the past 12 months. 2.A. 4 1. and/or its affiliates does not receive compensation for any services rendered or presents any commercial relationships with the subject company(ies) Redecard S.. or within the past 12 months has been. 2.
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