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• NEWS: Financial analysis of Brazilian groups • THIS MONTH'S TABLE: Year-end dates • RESEARCH PAPER: Reaction to the sale of an asset or a division • Q&A: Steps of an M&A process N° 52 September 2010 *** NEWS: Financial analysis of Brazilian groups
In December 2009, 377 Brazilian firms were listed on the Sao Paulo stock exchange. If we eliminate firms operating in the financial sector, firms that have filed accounts for less than four years and very small firms, we are left with 182 firms that account for 97% of the Brazilian market capital (with is around €930bn, or two-thirds of the market capital of Euronext Paris or about the same as that of Australia). We analysed these companies using standard financial analysis methods (1). Any readers wanting to consult their audited accounts can request copies via the letter box on www.vernimmen.com. Most of them end their financial year on December 31st. Wealth creation The combined sales of the Brazilian companies in the sample is €382bn, or the equivalent of the combined sales of BP and Shell. There is a very large gap between the biggest and the smallest listed Brazilian companies. 20% of the biggest account for 80% of sales and 86% of EBIT with average sales of €8bn and average EBIT of €1.4bn. On the other hand, 20% of the smallest account for 0.6% of sales, -3% of EBIT with average sales of €66m and average EBIT of -€1.7m. Concentration is much higher than in China
Next month : - NEWS: Debt and control premium - GRAPH: Corporate income tax rates - RESEARCH PAPER: Why do firms go public? - Q&A: ROCE when operating assets are negative
and similar to that of India
Energy is the leading sector, with 33% of total sales, experiencing a slow relative decline over recent years, with telecoms and consumer goods taking on a larger share. Natural resources, often cited as an emblematic sector in Brazil, are in decline and only accounted for 16% of 2009 sales:
(1) (2) (3)
See Chapter 8 of the Vernimmen. For more details see Vernimmen.net Newsletter n°23, February 2007. For more details see Vernimmen.net Newsletter n°40, March 2009.
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which only grew in volume by around 3.com newsletter 6% 6% 7% 33% Energy Natural resources Telecom Consumer goods Services 13% Industrials Utilities Others 2% N° 52 September 2010 15% 16% Unsurprisingly.The Vernimmen. these companies have grown in volume by around 4% per year. these listed companies have experienced high growth since 2006. in 2009. the operating margins of European groups were around 11%.4% per year over this period. This strong growth has been accompanied by stable operating margins. Brazil is able to capitalise on its natural resources and its high value-added products. with average growth of 9% per year. Unlike China (where this ratio was 9%) which specialises in low-price exports.com newsletter The Vernimmen. a higher rate than the Brazilian economy as a whole. Capital expenditure No weak spots were identified in the management of capital employed: (In %) Sales/Operating assets 2006 101 2007 104 2008 100 2009 87 Working capital is constantly improving in number of days of sales: 2006 2007 2008 2009 Working capital in days of sales 68 50 49 44 2 . With an annual inflation rate of around 5% in Brazil. with the exception of 2009: (In %) Sales EBITDA EBIT Net income 2006 100 29 21 13 2007 100 29 21 14 2008 100 28 21 12 2009 100 25 16 11 For comparative purposes.
com newsletter Unsurprisingly. Profitability The profitability of listed Brazilian firms is acceptable with after tax ROCE at around 10% in 2009 (16% in previous years) for a cost of capital of 12%.33 41 N° 52 September 2010 The increase in debt. since 2007. the Brazilian companies in our sample have.The Vernimmen. These figures show that investors are expecting better results in the future that the volume of activity of the Brazilian economy in the first quarter of 2010 (+9. generated free cash flows after financial expense that are more or less balanced: (in R$bn) Cash flow . Brazilian groups have adopted a dividends policy in line with growth that is slowing down. which is the average for the European majors. Brazilian groups have also been impacted by the financial crisis and lost a lot of their value in 2008 before recovering in 2009. After all.Change in working capital + Other items = Cash flow from operations . as we shall see further on. By paying out 49% of their profits in the form of dividends.83 . .11 96 2009 168 -5 -5 168 176 -8 . the Brazilian GDP will exceed that of France this year.Cash flow form investment = Free cash flow after financial costs Financed by : Equity raised .11 25 195 141 54 . especially at the moment.8% at an annualised rate) might lead one to expect. In fact. given its growth in volume which is closer to that of developed countries than of China or India. even though the Brazilian growth rate would be considered enviable in developed countries. 3 .dividend paid Increase in net debt 2007 159 . And so it goes… From a stock market point of view.4 times depreciation and amortisation.5 times 2009 EBITDA.46 -7 2008 165 101. Return on equity is even better given the moderate leverage effect of around 15% in 2009 and 20% previously. capital expenditure only amounts to 1. which rose by two-thirds between 2006 and 2009 remains reasonable overall.com newsletter The Vernimmen.0 54 118 201 . the only financial features of listed Brazilian firms that link them to emerging countries are their stock market parameters – P/B ratio of 4 and P/E ratio of 30 which is no mean achievement for firms that are only earning their cost of capital. Financing Given that the country is no longer experiencing spectacular growth and thanks to good earnings. representing 1.
except in Japan and in British influenced countries (India. with sales of over €1. excluding the financial sector. The calendar year is the determining criteria for choosing the date of the yearend.com newsletter The Vernimmen. % of year-end dates coincidating with the end of the year Asia. Australia and New Zealand).com newsletter Sao Paulo stock exchange index 80 000 70 000 60 000 50 000 40 000 N° 52 September 2010 30 000 20 000 10 000 0 01/2006 05/2006 09/2006 01/2007 05/2007 09/2007 01/2008 05/2008 09/2008 01/2009 05/2009 09/2009 01/2010 05/2010 09/2010 *** THIS MONTH’S TABLE : Year-end dates KPMG carried out a study on the dates on which firms end their financial years(1) based on a sample of 1.6bn.000 listed companies.The Vernimmen. (1) Comparative study of year ends in France and on the international market. Japan excluded Australia and New Zealand Benelux Canada Eastern Europe France Germany India Italia Japan Latam Northern Europe Russia South-Africa Southern Europe Switzerland UK United States Globally 88% 0% 97% 78% 89% 88% 83% 0% 94% 6% 100% 95% 100% 14% 90% 93% 46% 70% 64% Source: KPMG. 4 . South Africa.
and the transaction in such cases results in an increase in the market value of the acquirer.TRAVLOS (1987).E. They have come up with a theoretical model according to which the method of payment chosen sends a signal to the market that is the opposite to that sent in the case of an acquisition of a firm. the potential acquirer is required to make a formal offer on which the target shareholders have to vote. vol. shareholders are not required to vote.SLOVIN and M. 19% 64% 3% Jan 31 Others *** RESEARCH PAPER: Reaction to the sale of an asset or a division Market reaction to the acquisition of a firm is generally positive for the target. and bidding firm’s stock returns. The procedure is organised by the seller who pits potential acquirers against each other through an auction system. The acquirer has private information on the real value of its own shares and chooses to pay in shares when it believes that the company is been overvalued by the markets. it is the acquirer who decides whether to make a cash or share offer. Accordingly. On the other hand.E. Harvard Business Review. Researchers at HEC Paris have studied market reaction to the acquisition of an asset or a branch of a firm (2). n°2. M. N. p. but the choice of the payment method comes down to the seller who decides whether to accept an offer in cash or in shares. Review of Financial Studies.22.HEGE (2009). S. (1) For example. Corporate takeover bids. and the target decides whether to accept or reject it (it amounts to a take it or leave it offer).HEGE.B. but negative for the acquirer when the transaction is paid in shares. Equity or cash? The signal sent by the way you pay. p.SUSHKA et U. See also M.682-714. it sends a negative signal to the market. By making this choice.com newsletter The Vernimmen.SUSHKA (2009). or even to solicit an offer in shares from the best potential acquirer.LOVO. The best bid wins. The general idea is as follows: • for an acquisition of the whole of the firm. 5 . and to explain it on the basis of information asymmetry. methods of payment.com newsletter March 31st is the second most popular date as it is the end of the tax year in India and in Japan: Breakdown of firms by tax year-end 7% 3% 4% Dec 31 June 30 March 31 Sept 30 N° 52 September 2010 Source: KPMG. Equity and cash in intercorporate asset sales: theory and evidence. May 2009.943-963. n°42. • in the case of an acquisition of an asset belonging to the firm. (2) U.The Vernimmen. Journal of Finance. choosing to pay in cash rather than in shares is a positive signal. Financial research has made it possible to test this phenomenon on a wide range of samples (1).
the fact that it is the seller that makes the choice of payment reverses the signal on the value of the acquirer sent to the market. Their results tie in with their predictions. even if in reality he is.com newsletter According to this study. the signal sent out is negative if the buyer prefers to be paid in cash. there are no typical negotiating procedures. as is the case for an acquisitions of a firm. etc. N° 52 September 2010 Hege et al carried out empirical checks on their model. Every transaction is different. In the case of an operation paid in cash. retain managerial control. To preserve confidentiality. 6 . In principle. most often an investment banker. There exists two extrems: private negotiation and auction. so he’d rather be paid in the acquirer’s shares in order to benefit from a return on a positive investment. Hege et al find that the operational performance of the acquirer improves after an acquisition paid in shares. The acquiring company's share records an average super-performance of 3. (1) See The Vernimmen. Such specialists are usually paid a success fee that can be proportional to the size of the transaction. The only absolute rule about negotiating strategies is that the negotiator must have a strategy. Accordingly. Discussions then begin.com Newsletter n° 28 November 2007. But price is not everything. financial and human resource elements. on the basis of a sample of partial acquisitions in the USA between 1989 and 2002. the timing and the seller’s demands.The Vernimmen. Unsurprisingly. the necessary degree of confidentiality. After signing a confidentiality agreement. Conversely.com newsletter The Vernimmen. It is important that each potential acquirer believe he is not alone. while it remains unchanged following an operation paid in cash. In relation to the size of the acquisition operation. The seller might also want to limit the guarantees he grants. ensure that his employees’ future is safe. *** QUESTION & ANSWER: Steps of an M&A process A negotiating strategy aims at achieving a price objective. Our personal experience tell us the same thing: the context dictates the choice of a strategy. there is a wide range of possible negotiating strategies. the potential acquirers might receive an information memorandum describing the company’s industrial. the impact is close to zero (underperformance of 0. Academic researchers (1) have established that none of these strategies is better than another.15%. to find potential acquirers and keep all discussions under wraps. Strictly speaking. the seller is advised to be very careful when choosing the method of payment. Depending on the number of potential acquirers. this technique requires extreme confidentiality. the seller always benefits from the operation. Payment in shares means that the seller believes in the value of the asset that he is selling and in the quality of the transaction for the acquirer. the seller often prefers to hire a specialist.44% at the time of the announcement of the operation when it is paid in shares.03%). 1/ Private negotiation The seller or his advisor contacts a small number of potential acquirers to gauge their interest. Finally. this represents an average return on investment of 20. Psychological rather than practical barriers to the transaction necessitate the high degree of confidentiality.
A memorandum of understanding is a moral. • the payment terms. An auction is often private. The commitments of each party are irrevocable. spelling out the terms and conditions of the sale. N° 52 September 2010 The advantage of private negotiation is a high level of confidentiality. The memorandum of understanding is not useful when each party has made a firm commitment to negotiate. (a) Memorandum of understanding (MOU) or letter of intent (LOI) When a framework for the negotiations has been defined. Every transaction is different. In many cases. there are no typical negotiating procedures. to find potential acquirers and keep all discussions under wraps. leaving one all-important parameter: price.com newsletter To preserve confidentiality. • and any contractual relationship that might remain between the seller and the target company after the transaction. Such specialists are usually paid a success fee that can be proportional to the size of the transaction. As you might expect. The agreement in principle can take many forms. The only absolute rule about negotiating strategies is that the negotiator must have a strategy. Everything that might have been said during the course of the negotiations falls away. For more read chapter 42 of the Vernimmen. obligation. a memorandum of understanding slows down the process rather than accelerating it. 2/ Auction In an auction. 7 . unless there are conditions precedent such as approval of the regulatory authorities. the management of the acquiring company presents it to its board of directors to obtain permission to pursue the negotiations. The discussion focuses on: • how much control the seller will give up (and the status of any remaining minority shareholders). In this case. • any conditions precedent. • representations and warranties. most often an investment banker. The objective is to choose the one offering the highest price. Strictly speaking. but it can also be announced in the press or by a court decision. a memorandum of understanding is often signed to open the way to a transaction. the seller often prefers to hire a specialist. the company is offered for sale under a predetermined schedule to several potential buyers who are competing with each other. there is no paper trail at all. not a legal. (b) Agreement in principle The next step might be an agreement in principle. Often.com newsletter The Vernimmen.The Vernimmen. once the MOU signed. • the price. price remains the essential question in the negotiating process. We now take a look at the various agreements and clauses that play a role in private negotiation.
Princeton University and NBER Modeling Financial Contagion Using Mutually Exciting Jump Processes (with Julio Cacho-Diaz and Roger Laeven) Discussant: ALFRED GALICHON. London School of Economics 8 10:20 10:30 11:00 11:45 12:30 pm 2:00 2:45 3:30 4:00 . Yale University Asset Pricing. 2010 Pavillon Gabriel. and Empirics Discussant: ADLAI FISHER. Euromed School of Management DAVID VEREDAS. 75008 Paris Registration Welcome PETER C. Bubbles. Université Paris 6 YACINE AIT-SAHALIA. Université Libre de Bruxelles Coffee Break VERONIKA CZELLAR.The Vernimmen. University of Chicago Nonlinear Filtering and Learning Dynamics (with Lars Peter Hansen and Thomas J. 5 avenue Gabriel. University of Geneva MARCUS FEARNLEY.com newsletter *** We are pleased to announce the SECOND HEC Paris FINANCE AND STATISTICS CONFERENCE Organised by Laurent E.com newsletter The Vernimmen. Ecole Polytechnique Coffee Break LUBOS PASTOR. Princeton University Vast Volatility Matrix Estimation using High Frequency Data for Portfolio Selection (with Yingying Li and Ke Yu) Discussant: JEAN JACOD. Imperial College London NICK POLSON. PHILLIPS. HEC Paris DIEGO RONCHETTI. University of Chicago and NBER On the size of the active management industry (with Rob S tambaugh) Discussant: AMIL DASGUPTA. University of Lugano ENRIQUE TER HORST. University of British Columbia Presentation of poster sessions PIERRE BAJGROWICZ. HEC Paris Efficient Estimation of Learning Models (with Laurent E. Sargent) Discussant: JUNYE LI. ESSEC Lunch JIANQING FAN. Calvet and Veronika Czellar N° 52 September 2010 Program 9:00 am 9:30 9:35 October 8. Calvet) Discussant: PAOLO ZAFFARONI. B.
COM NEWSLETTER: COMPLEMENTARY TO THE BOOK AND TO THE WEB SITE WWW.NEWS: Debt and control premium .RESEARCH PAPER: Why do firms go public? . a i Ri i 1 n The Vernimmen.GRAPH: Corporate income tax rates .hec.Q&A: ROCE when operating assets are negative THE VERNIMMEN.COM .VERNIMMEN. HEC Paris and NBER A Multifrequency Theory of the Interest Rate Term Structure (with Adlai J. CALVET. University of Washington Conclusion Cocktail 5:30 N° 52 September 2010 5:45 Registration is free and available on the conference website : www.com newsletter 4:45 LAURENT E. Fisher and Liuren Wu) Discussant: ANDREW SIEGEL.com newsletter The Vernimmen.fr/financeandstatistics2010 Next month : .
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