Latin America, The New Frontier

Editor: You have had vast experience in practice areas such as cross border transactions. You are also head of the firm's Brazil practice. What in your experience caused you to focus on Brazil?

Angus: I lived in Brazil as a missionary for the Church of Jesus Christ of Latter-Day Saints from 1984 to 1986 where I learned Portuguese, which led to my interest in Brazil. My work in our New York and London offices entailed cross border M&A, private equity, consensual restructuring and some equity capital markets work.

I returned to New York last year after four years in our London office to focus on building our Brazil practice, as well as building our practice elsewhere in Latin America.

Editor: From a previous time when Brazil was quite protectionist to the reversal today of having a liberalized trade policy with every effort being made to attract foreign investment, Brazil is a model for the developing nations of the world.

Angus: There has been an explosion in the capital markets in Brazil over the last 18 to 36 months. The last time President Lula ran for office, investors became cautious because of his connection with the Workers' Party, but today investment is on the increase since investors are satisfied that Brazil will continue to pursue a stable economic policy that does not change with every administration. President Cardoso, President Lula's predecessor, was dedicated to encouraging sound economic development. The fact that Lula has continued those economic policies has inspired great confidence. Brazil is fortunate in having had a succession of strong finance ministers.

Brazil has also been characterized by rapid economic growth in various sectors over the last three years, particularly in the commodities, agriculture and energy sectors, including alternative energy tied to agri-business. These sectors have also become core sources of growth for many of the developing countries of Latin America.

Editor: I recall that Bolivia attempted to cut off the gas supply to Brazil. How has that turned out?

Angus: Bolivia seized a number of the Bolivian facilities of Petrobras, which is the Brazilian state-controlled oil company. There was a mixed reaction by President Lula to Bolivia's actions, while Petrobras strongly opposed the Bolivian government's actions in seizing these facilities. There has not been a resolution as yet to this situation, although there are some signs that Petrobras and the Bolivian government may be able to reach some type of compromise. This affair is a major issue in Brazil. Bolivia's actions, because they were somewhat unexpected by Brazil, came both as surprising and disillusioning. Petrobras has stated that it will no longer invest in any Bolivian projects until a satisfactory resolution is reached. Brazil is looking to gain energy independence based on further development of its own natural gas and other energy resources.

Editor: Have Brazil's more liberalized policies resulted in increased M&A activity?

Angus: Yes, but there are other factors as well. The opening up of trade has contributed to economic development. The expansion of Brazil's capital markets has attracted capital to mid-level companies that encourages these companies to seek combinations with competitors. The Brazilian Central Bank (Banco Central do Brasil) and the Brazilian SEC (Comisso de Valores Mobilirios - CVM) have both played significant roles in the development of the Brazilian capital markets and the recent increase in M&A activity over the last few years. Export growth has also encouraged corporate growth in sectors like commodities, steel, and energy.

Editor: Has the absence of any serious antitrust activity in Brazil on the part of government regulators added to this merger activity?

Angus: I am not sure that Brazil's antitrust authority - CADE (Conselho Administrativo de Defesa Econmica) - or CADE's regulations have played much of a role in recent merger activity. While CADE is concerned about anti-competitive behavior that might result from M&A activity, I don't believe the regulatory environment is the main driver to the increased M&A activity in Brazil. As I mentioned, the real drivers are economic. Companies view mergers as a way to achieve the right size so they can defend their local market as well as compete internationally - and the regulators are reluctant to intervene where a local company is perceived simply as defending its turf against the growing presence of large foreign multinationals. Sadia's attempt to acquire Perdigo in Brazil's first unsolicited takeover offer was another example of attempting to achieve the right size to compete with multinationals in the local market and to become more competitive outside Brazil.

Editor: Could you tell our readers about the AmBev acquisition of an equity interest in Quilmes Industrial (Quinsa)? What regulatory approvals were involved? Was shareholder approval required? Was it necessary to get prior antitrust clearance?

Angus: Because of the size and nature of the transaction ($1.25 billion), regulatory and shareholder approvals were required. The major regulatory approvals involved Argentina and Brazil because the companies' beverage products are distributed widely in both countries. As to antitrust, unlike the U.S., Brazil has a post-transaction approval process.

Editor: The sale by Banca Intesa of its Peruvian subsidiary to Scotiabank must have required extensive knowledge of the laws of all countries involved. What amount of time was required to do this transaction? How much did Weil have to engage lawyers from the other countries involved to consummate this deal? Please tell our readers about some of the hurdles that had to be overcome.

Angus: The sale of Banco Wiese Sudameris (BWS) in Peru by Banca Intesa, transferring its controlling interest to Scotiabank, was completed prior to the Peruvian presidential election in a year where there were widely contested political views on how each candidate would deal with foreign investment and growth in the economy. That made it interesting because we had to deal with a number of political issues along with the legal ones.

Working with Italian counsel was critical in view of the fact that Banca Intesa is a regulated entity in Italy and also subject to extensive European Union regulation. We worked closely with Peruvian counsel as well, making sure we addressed all the Italian and Peruvian issues. Given that we were representing the seller, most of the Canadian issues were on the purchasers' side. In the financial services sector there are always many regulations, often involving a variety of jurisdictions, which create challenges in structuring a deal and getting the necessary approvals.

Peru is not like the U.S. There are a limited number of transactions and the political sensitivity of a bank changing ownership creates other issues. Because of these factors it takes considerable time to complete a deal. Six months to a year is the typical time period for a transaction of this magnitude in the banking sector. Part of it is making sure that you provide the authorities with the information they need. Once you are able to sign a deal, you can go quickly and address all the matters you need to with the authorities - but, you need to have everything tied up long before meeting with them.

Editor: Another deal that must have posed additional complications was the purchase of Transelec, Chile's power transmission company, by Brookfield Asset Management and Canadian pension funds. Are there any strictures against foreign ownership of utilities? Do you have to have public hearings in the case of such a transaction since it would appear to be a business affected with a public interest?

Angus: In Chile, it is a question of being qualified to operate a utility company. There is no prohibition on foreign ownership in the power distribution sector. In Chile, there is no requirement for public hearings.

Many jurisdictions in Latin America have some type of public involvement in the regulatory approval process. In Brazil the energy regulator, Agencia Nacional de Energia Eltrica (ANEEL), approves transactions in the energy sector. We participated in a number of energy deals during the Brazilian privatizations in the late 1990s. Although there were no public hearings as are typical in the U.S., the public as well as other parties that might be impacted by the sale had various ways to object and voice concerns through the overall privatization process.

Editor: Are foreign investors free to enter Brazil's telecom sector?

Angus: There is a lot of foreign ownership in Brazil with many North America and European companies in the market. Amrica Mvil, the wireless company spun off from Telmex, a Mexican wireless telecommunications company with many operations in South America, is there. Also, Telecom Italia's wireless unit, TIM, owns large concessions and Spain's Telefonica owns large concessions in both the land-line and wireless sectors in Brazil.

The greatest concern of many South American countries is making sure that qualified operators are in place. Also, they want to make sure that a competitive environment is preserved.

Editor: How do you go about assembling a deal team to cover all areas in a cross border acquisition? How closely do you work with local counsel?

Angus: At Weil we have a full service team on the U.S. law side which includes expertise on tax, environmental, employment and other issues as well as lawyers with the right experience in the region and language capabilities. The key factor is to find local counsel that is experienced in the area and who can work well with you. You want your local counsel to be on the same page with your people, addressing the same issues and working as an integrated team.

For example, if you are representing a North American or European client, you need to understand how the local issues that you will encounter fit into the client's regulatory and corporate picture to make sure that local counsel will address them and work with you as part of an integrated team.

While some clients have their own contacts with local counsel, there are a growing number of local counsel with whom we regularly work. The results have usually been excellent because they are knowledgeable about the client, its business and any legal issues it faces.

Editor: What do you see as a future trend for international ownership of Latin American companies?

Angus: You will see increased international participation. Private equity investments will significantly increase in countries like Brazil that actively encourage foreign investment. Given its more mature capital markets, most of the mid-level and larger companies are accessing U.S. and European institutional investors through Reg. S and Rule 144A offerings and they are not registered in the U.S. Many of these issues are registered with the Brazilian SEC and listed on the BOVESPA (the Brazilian stock exchange in So Paulo), where certain issuers have opted to comply with the higher disclosure and governance standards recently adopted by the BOVESPA.

While Brazil, Argentina and Mexico will continue to attract more private equity investment, over the next few years you may see a change in some Latin American countries in areas where there is a strong state interest, such as in natural gas and petroleum. In some Latin American countries, as prices for petroleum and natural gas have increased, there has been growing concern that the state is not getting a proper share of the profits which may impact foreign investment.

Editor: Do you see further consolidation of ownership among Latin American companies?

Angus: Yes. As I mentioned, the driving force behind this is the need to create entities that are of a size and scope to compete internationally as well as regionally. Latin America is still a developing market so there will be fluctuations, but growth will continue in the many areas which cry out for development.

Published October 1, 2006.