Exhibit List - Duke's Fuqua School of Business
The Privatization of Banco do Estado de São Paulo (BANESPA)
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Case Document Tadeu Nunes
Diane Nakayama-Shapiro
Marcio Passos
Terence Tong
Debbie Vann
The Privatization of Banco do Estado de São Paulo (BANESPA)
Introduction
Emilio Botin, Chairman of Banco Santander Central Hispano “Santander” lies on his massage bench receiving his weekly massage while he puffs his Havana. He reads the headlines on the O Globo[1], November 15, 2000 entitled Brazil: Citibank and BBVA quit Banespa tender.
“The foreign banks Citibank, Banco Bilbao Vizcaya Argentaria (BBVA)….BankBoston announced they will not take part in Banespa’s auction….the banks had three main reasons: the high price, the hard competition among the domestic institutions and the volatility in the global financial markets”.
As he considers the potential dynamics of the auction, Botin calls Gabriel Jaramillo, the president of Santander-Brazil, to discuss the impact of the news, as well as the valuation and Santander’s bid. Jaramillo, anticipating Botin’s call, begins the conversation explaining the recent auction of Banestado.
Banestado, from the State of Paraná (See map in Exhibit 1), was the second most important state bank in the government’s privatization program. The privatization received a tremendous amount of press, as it provided a reference point for the upcoming Banespa privatization. The market anticipated heated competition as the three largest Brazilian Banks, Bradesco, Itaú and Unibanco, and key foreign banks, Citibank, ABN AMRO (The Netherlands) and Santander, were qualified to participate in the auction on October 17, 2000. (Refer to Exhibit 2 for Brazil’s auction rules.)
Jaramillo explains that the Central Bank established a minimum price of BRL 434 million (USD 232 mil) for Banestado. Bradesco bid BRL 710 million (USD 384 mil), which was considered a low offer. Unibanco surprisingly submitted an aggressive bid but lost to Itaú during the open auction. Itaú won with the final bid of BRL 1.625bn (USD 878 mil) in an auction that established new benchmarks for the bank privatization process: 300% above the minimum price and 4x P/BV. Since none of the foreign banks submitted bids, the market reading was that banks were saving efforts and cash for the Banespa auction scheduled for the next month. (See Exhibit 3 for detailed bid results.)
Botin tells Jaramillo to figure out his game plan and to make sure that Santander’s bid wins the auction. After hanging up the phone, Jaramillo wonders what he should do to win the auction. Had Itaú bid only BRL 54.2 million (USD 29 mil) more in the sealed bid auction, they would have won without requiring an open auction and would have paid a lower price after all. What could he do to ensure that Santander wins Banespa without paying too much?
The Brazilian Economy
Brazil is the largest country in Latin America and the 8th largest economy in the world. In 1998, its GDP was USD 776 billion, representing 52.7% of Latin America’s total GDP, excluding Mexico (See Exhibit 4). Despite its apparent success, Brazil has endured long periods of inflation (See Exhibit 5), causing the government to react with changing economic plans. The most recent plan, the Plano Real (Real Plan), which was implemented in 1992, has been the most successful of the Brazilian economic plans and has succeeded in keeping inflation at reasonable levels since September 1994.
One of the major features of the Real Plan was the exchange rate, which was pegged to the U.S. dollar. The constant threat of imported products placed pressure on local prices. Yet, the government’s inability to implement disciplined fiscal policy led to an over reliance on monetary policy to maintain the currency peg and control demand. To make matters even worse, the “world recession, the Asian crisis and the Russian debt crisis in particular placed considerable pressure on the country’s finances.”[2] Brazil had little room to fight a capital flight from the country. On January 13, 1999, Brazil allowed its currency to fluctuate.
After the currency devaluation, the economic forecasts were pointing to a recession and a strong increase in inflation. However the recovery was much faster than expected. In 1999, inflation was 8.9%, and GDP growth was 1%. During the first half of 2000, GDP grew by 3.8% YOY (year over year). The growth rate is expected to increase slightly in the second half of 2000 amid strengthening private consumption, investment and exports, which would result in full-year growth of around 4%. Inflation is expected to end the year under 6%, compared to the U.S. rate of 3%. The exchange rate has fluctuated by an average of only 1.6% monthly since the beginning of 2000 and is expected to remain relatively stable. (See Exhibit 6 for forecasted economic indicators.)
The Brazilian authorities' commitment to fiscal and monetary discipline will create the conditions needed to maintain stable inflation levels in the future. If inflation remains under control, the Real will be able to stay broadly stable in nominal terms without implying a significant erosion of competitiveness.
Brazil's long history of political and economic volatility, sluggish export growth, woes of the local stock exchange and blocked reforms in such areas as tax reform continue to hinder portfolio investment. While foreign firms are willing to invest in their own Brazilian affiliates, fund managers and individual investors remain wary of placing funds in local companies that they do not control.
As a result, foreign direct investment (FDI) has continued to pour into the country. FDI reached USD 26.9 billion for 1999-- a record figure. Despite the slowdown in privatizations of government owned companies, net FDI inflows for 1999 are expected to be USD 17.2 billion.[3] Portfolio investors, meanwhile, continue to speak of "Brazil risk" and net flows for investment in securities are expected to be negative by USD 8.1 billion in 1999.
Another source of apprehension for foreign investors is Brazil's openness to contagion effects from other emerging markets, in particular Argentina. In the last few years Argentina has struggled to restart its economy and has so far been unable to generate enough confidence both domestically and internationally to resume growth.
The increasing capacity utilization and privatizations will enhance foreign direct investment in the short term. However, the economic landscape continues to have risks. Uncertainty surrounds the outcome of the presidential election in 2002, which could hinder aggressive recovery imposed by the current president. Brazil's terms of trade will not improve significantly as the impact of strong global demand on the price of manufacturers offsets rising prices for Brazil's main export commodities. Growth may also be limited by supply-side constraints already evident in the recent surge in imports of intermediate goods.
Brazilian Banking Sector
The financial services industry in Brazil consists of both government owned and privately owned institutions. The Central Bank supervises all of the financial institutions according to regulations set by the National Monetary Council. Through this relationship, the federal government issues currency and controls the money supply, foreign capital, lending limits and other high level financial issues. In addition to the Central Bank, the federal government also controls 48% of the assets in Brazil’s banking system.
The Central Bank in Brazil imposes requirements on banks within the country that puts them at a clear disadvantage in comparison with their peers in other countries. (See Exhibit 7.) Current Central Bank regulations require banks to deposit 45% of their demand deposits in a non-interest bearing account.[4] The Central Bank also requires banks to deposit 15% of their average savings accounts balance.[5]
The Brazilian private banking sector is largely dominated by three domestic banks: Bradesco, Banco Itaú, and Unibanco. Together, they represent approximately 20% of the market measured by assets, while the total private sector accounts for 52% of the assets. While some private domestic banks have operations outside of Brazil, most focus on domestic customers. On the other hand, there are also almost 70 foreign controlled financial institutions in Brazil with 23% of the market. Examples include Citibank and Bank Boston (Brazilian subsidiary of FleetBoston), which have been in Brazil for years but currently (1999) have assets of USD 7.6 billion and USD 9.9 billion, and 51 and 64 branches, respectively.
The private banks provide short-term loans and popular savings accounts that guarantee interest yields above the rate of inflation. Additionally, they offer services including investment banking, consumer lending, pension funds management, and asset management. Prior to the implementation of the Real Plan in 1994, official interest rates were so high that loan and deposit spreads were highly profitable for the banks. More recently, the drastic reduction in inflation and interest rates has greatly reduced the main revenue source for Brazilian banks. A traditional source of revenue had been from gathering deposits from customers and investing in high yield government bonds. With more stable rates, banks must find new sources of revenue through non-interest income, such as fee-based transactions, asset management, insurance, and other financial services.
Privatization in the Banking Sector
While the government and private banks have a large share of the domestic market, foreign players have gained market share in the 1990s. These footholds have been achieved primarily through acquisitions. Exhibit 8 includes recent M&A activity in Brazil’s banking sector. The government is expected to privatize many of the banks, the largest being Banespa.[6] (See Exhibit 9.)
The Privatization of Banespa
History
The Brazilian Federal Bank intervened in the management of Banespa in 1994 when the bank was faced with a liquidity crisis. The anti-inflationary measures taken by the government through the implementation of the Real Plan set the stage for the increase in non-performing public loans and the collapse of the State of São Paulo bonds.[7] Eventually, in December 1997, 50% of the banks common shares were transferred from the State of São Paulo to the Federal government. In 1999, the Federal government acquired another 16% of the bank’s common shares.
With the eventual financial cleanup in sight, the first mention of the privatization of Banespa arose in April 1997. Although the auction date was tentatively set for May 16, 2000, the privatization process has encountered some problems. The process was delayed when the banking union of São Paulo filed an injunction in the Supreme Court of Justice to oppose the privation process, as it threatened their job security. Their main contention was that the privatization process did not adhere to the bidding laws, and that the participation of foreign banks in the auction of a state bank was unconstitutional.[8]
The uncertainty from this legal quagmire has undermined Banespa’s competitive nature, since the bank’s management has deferred important business initiatives as a result of the pending privatization. Thus, the longer the privatization process is delayed, the more the valuation of Banespa will deteriorate. Additionally, there is anecdotal evidence that the pre-qualified banks for the auction may refocus their attention to other acquisition targets.
The Privatization Process
The privatization process will be made in two stages: 1) An offer to Banespa’s employees and 2) An auction to participating banks. Through this process, the federal government intends to sell 12.48 billion shares, representing 66.87% of Banespa’s voting capital, and 33.33% of its total capital.
Employee Offering
1.248 million shares of stock, which represent 10% of the voting capital of Banespa, will be offered to Banespa employees, CABESP and BANESPREV.[9] The price for these shares has been set at BRL 97.4 million (USD 52.1 mil), which was calculated by using a 50% discount on the minimum economic value per share of Banespa. Current and retired employees of Sistema Banespa, CABESP and BANESPREV as of March 31, 2000 are entitled to acquire employee stock. If the employee shares are not entirely purchased, the winner of the auction must purchase the remaining employee shares at the per share price from the auction.
The Auction
The auction will take place at the Rio de Janeiro Stock Exchange at 10:00am on November 20, 2000. 11.23 billion shares, amounting to 60% of Banespa’s voting capital and 30% of its total capital, will be auctioned. The minimum price for Banespa is set for BRL 1.85 billion (USD 989.3 mil). [10]
Tender offer for minority shares
The winner of the auction in Stage 2 of the privatization process will gain a controlling stake in Banespa and the ability to acquire the remaining shares through a tender offer. Brazil’s current legislation requires that any tender offer that does not involve a share swap acquire at least two-thirds of the outstanding shares in the market.[11]
Competitive Landscape
Potential Bidders
An important aspect to consider about banking, and particularly in Brazil, is that size definitely matters. A larger bank benefits from greater operating efficiencies, breadth of product offerings, and a larger customer basis, all of which promote cross selling and provide a larger capital basis. Therefore, Banespa presents a great opportunity to gain scale for anyone interested in the Brazilian and Latin American financial markets.
While the expected participants in the Banespa auction are domestic banks, there is a possibility that foreign banks could participate. For a foreign bank, acquiring an operation such as Banespa’s would be an important strategic move. Some of foreign banks have been pre-qualified to participate in the public auction. Although many have said they will not participate for different internal and strategic reasons, there is always the chance that they still will bid for the opportunity to become an important player in the Brazilian financial market.
São Paulo, where Banespa’s branches are concentrated, is the main economic center for the Brazilian economy, accounting for roughly 60% of the country’s GDP and a significant portion of Latin America’s GDP. The state’s economic position has historically attracted a vast majority of financial institutions to the region. The major players in the Brazilian banking sector are based in the state and have very good branch coverage. One of the main benefits from acquiring Banespa, in addition to acquiring a large client basis, is potential cost savings and operational efficiencies. In this sense, an acquiring bank with an overlap in coverage would close branches and relocate clients to remaining ones. On the other hand, banks with a complementary footprint would be buying a presence in the most attractive market within Brazil.
With these factors in mind, the main interested parties in Banespa’s privatization would be Bradesco, Itaú, Unibanco, and Santander. (See Exhibit 10.)
Bradesco
As the largest privately owned financial institution in Brazil with 1999 assets of USD 45 billion and deposits of USD 21 billion, Bradesco offers its clients not only traditional commercial banking services but also insurance, asset management, credit card, and leasing (through subsidiaries). The bank has the largest network in country (September 2000), with 2,556 branches (922 in State of São Paulo), 1,119 POS sites, and 17,448 ATMs. [12] It is also the largest bank in terms of assets and customer base (10.1 million retail clients).
The bank has faced tremendous growth in the recent years, primarily through acquisitions, including: BCN (1997), BANEB (1999), and Banco Boavista Interatlantico (2000). Such acquisitions have helped Bradesco to boost its client and asset base, while simultaneously improving the bank’s deposit base and credit portfolio.
Bradesco is also a key player in credit cards, asset management and insurance. In mid-2000, there were 4.4 million Bradesco credit card holders. The bank’s strong franchise has permitted several strategic partnerships with top foreign players in asset management and insurance. The bank has joint ventures with Templeton to manage third party funds, and Allianz and Prudential to provide insurance products.
Banco Itaú
Banco Itaú is the financial arm of the holding company Itaúsa, which has significant stakes in different industries such as construction materials, petrochemicals, consumer electronics, lumber, and data processing.
Itaú is the second largest privately owned bank in Brazil, with 1999 assets of USD 29 billion, deposits of USD 13 billion, and 5 million retail clients. As of September 2000, the bank had 1,754 branches (508 in State of São Paulo), 712 POS sites, and 11,570 ATMs. In addition to a large footprint in Brazil, Itaú also has a sizeable operation with 94 branches in Argentina. Like other large commercial banks in Brazil, Itaú also offers its clients a wide variety of financial services including insurance, asset management, credit cards, and leasing subsidiaries.
The bank has been growing recently through acquisitions, particularly of formerly state owned banks. It acquired Banco do Estado do Rio de Janeiro (Banerj) in 1997, Banco do Estado de Minas Gerais (Bemge) in 1998, and Banco do Estado do Paraná (Banestado) in 2000. These acquisitions positioned Itaú as the leading bank in three of the five wealthiest states in Brazil. Meanwhile, the bank has also expanded into Argentina through its 1998 acquisition of Banco de Buen Ayre, SA.
Itaú is strong in terms of non-traditional financial services. By mid-2000 the bank had 2.8 million credit cardholders and offered over 270 types of investment funds, including money market, fixed income, and equity funds. The bank also is the largest custodian in Brazil for institutional investors and private clients. Additionally, Itaú’s brokerage business has been consistently ranked among the top four in Brazil.
Unibanco
Unibanco is the third largest privately owned bank in Brazil. In 1999, it had assets of USD 21 billion, deposits of USD 5.2 billion, and 3.6 million retail clients. The bank’s network comprises of 697 branches (361 in the State of São Paulo), 389 POS sites, and 4,923 ATMs. The acquisition of Banco Bandeirantes in July 2000 brought an extra 250 branches and 251 POS sites to the network. In line with the other banks, Unibanco has been growing through acquisitions: Banco Nacional in 1995, 50% of Banco Fininvest in 1997, Banco Dibens in 1998, and Banco Credibanco in early 2000. The acquisition of Banco Nacional, which was once the third largest private bank in Brazil with 1.2 million customers and 334 branches, was certainly the biggest move for Unibanco and made it a national player.
Banespa would provide Unibanco with a significantly larger client base. With a smaller number of branches in São Paulo, however, Unibanco is the least likely to benefit from efficiency gains from the acquisition of Banespa, since it would have to operate Banespa’s relatively inefficient branches while making heavy investments to upgrade their technology.
Like the other large commercial banks, Unibanco also offers a wide range of financial services including insurance, credit cards, asset management, and leasing through its subsidiaries. As of June 2000, the bank had 3.6 million credit cardholders, including 625,000 e-cards (used exclusively for the Internet). Unibanco Asset Management is also an important business, ranked 3rd largest by assets under management. It offers fixed income, mutual funds, and portfolio management services. In the insurance business, Unibanco formed a joint venture with AIG in 1997, creating the fifth largest insurer by premium in Brazil in 1999.
Banco Santander Central Hispano (Santander)
Building a Strategic Global Presence
Santander is the largest financial group in Spain and the 6th largest in Europe. The bank has a significant presence in Latin America and Europe. Its asset base includes USD 307 billion and more than 10,000 branches serving 35 million customers. Under the leadership of Emilio Botin as chairman since 1986, a large portion of Santander’s earnings growth has been generated through strategic acquisitions.[13] This key strategy has enabled the firm to build a dominant position in Spain, with economies of scale and scope in an attractive and growing financial market. It has a 17% market share in private sector loans and a 10.2 million client-base. In Latin America, it has been successful in creating one of the two largest retail banking franchises, with an overall 9% market share and 20.8 million clients. Additionally, it has positioned itself on a comprehensive platform of strategic partners in Europe that might enable it to become a leading European financial institution. Santander funds its acquisitions through new equity issues and then restructures the banks to generate increased profitability.
Santander’s profit breakdown by region is as follows: Spain (50%), Latin America (26%), Europe (21%) and others (3%). Its integration process has proven to be effective to date. In the last two years, its total business has grown by EUR133 billion from EUR305 billion to EUR438 billion. Meanwhile the bank’s cost/income ratio has decreased from 62.1% to 56.1% as its customer base has increased from 24 million to 35 million. The overall effect of these improvements has resulted in an 81% increase in net attributable income from EUR1,250 million to EUR2,258 million.[14] The bank has achieved these results by improving operational efficiency, optimizing branch networks by closing 1,000 (15%) branches, restructuring network distribution by migrating transactions to lower cost channels, and integrating technology and operations across the globe.
Project America
Santander first began operations in Brazil in 1982 in the areas of treasury and capital markets. In 1997, it ventured into retail banking with its acquisitions in Banco Geral do Comercio and Banco Noroeste. In 1999, it started the “Project America,” which was intended to improve profitability, enhance efficiency and increase market share in Latin America. [15] Its strategy is to create a global financial group with a regional focus. Within two years, Santander improved ROE by 6.2% to 20.9% and enhanced efficiency by 8.3% to 53.1%.[16] In an effort to increase market share in 2000, the bank purchased the Serfin Financial Group in Mexico, the Grupo Financeiro Meridional in Brazil, Merrill Lynch’s asset management business in Puerto Rico, and 55% of Previnter, a pension fund management company.
The book value of Santander’s Brazilian banking operations total approximately BRL 3 billion (Refer to Exhibit 11). The estimated P/BV for their Brazilian banking operations is approximately 1.5x, which is low compared to the large Brazilian banks.[17]
Banco do Estado de São Paulo (Banespa)
Banespa – A Vital Establishment in the heart of São Paulo
Banespa is the largest state-owned bank in Brazil. It was founded in 1909 and has since been closely linked with the economy of the State of São Paulo. It is currently the fifth largest bank in Brazil in terms of deposits. The bank has USD 15.5 billion in assets, USD 6.1 billion in deposits, USD 2.4 billion in loans and USD 3.6 billion in mutual funds. It ranks 5th among Brazilian banks in capital and reserves with USD 2.4 billion. (See financial statements in Exhibits 12 & 13.) It also has a very extensive distribution system: 22,620 employees in 573 branches, 742 PABs (mini-branches located within another organization), 692 POS, and 598 ATMs.[18]
Ninety-four percent of its branches and PABs are located in the State of São Paulo. It focuses primarily on retail banking and has a 2.8 million customer-base. Two million customers (71%) are public servants, who represent one of the most attractive segments because of their high-income level and stable employment. Also, 1.5 million customers receive monthly payroll through the bank. Another cross sectional analysis of Banespa’s customer base indicates that 1.8 million are middle to high income. Additionally, the bank has 100,000 small and medium companies (SME) as customers. Over half the customers’ salaries are paid through the bank accounts, resulting in higher customer retention and loyalty.
Banespa: An Excellent Fit for Santander
The Benefits to Santander
Jaramillo considers Banespa to be an excellent fit for Santander because of Banespa’s market position as a leading bank in São Paulo. Its distribution network and the size and quality of Banespa’s retail client base would enable Santander to expand its market share in a meaningful way. Banespa’s retail banking business would allow Santander to tap a low cost deposit base and to cross-sell packaged products to Banespa’s 1.8 million middle to high income customers. This low cost funding becomes even more valuable given the expected waiver in reserve requirements by the Brazilian monetary authority (estimated by analysts at BRL 110 million in 2001).[19] Moreover, Banespa has a relatively low risk profile and strong capitalization as indicated by the bank’s loans/assets ratio is 14.1% (peer group average of 36.9%) and equity/total assets ratio of 15.4% (peer group average of 10.2%). Overall, Jaramillo is convinced that his team would be able to tap into the high quality client-base by cross-selling innovative products, leveraging Banespa’s low cost funding and improving operational efficiency that results in lower operational costs.
If Santander is successful in acquiring Banespa, Jamarillo would head the third largest private financial group in Brazil, with USD 30 billion in assets (9% market share), USD 9.5 billion (7.2%) in deposits, USD 5.2 billion (5%) in loans, and USD 6.6 billion (6%) in managed funds.[20] His group will have 1,970 offices and points of sale throughout the country, including a branch network of 900 offices in the southern part of the country.
Santander’s Track Record in Brazil
Within a short time, Santander has developed an impressive track record in Brazil. The bank has already demonstrated its ability transform bank operations successfully in Brazil, through the integration of five banks to date. Santander has created a leading wholesale bank with one of the best management teams in Brazil. Between 1998 and 2000, it has increased its ROE and efficiency ratios in its Brazil operations from 14.1% and 66.1% to an anticipated 25.0% and 42.0%, respectively.[21]
Potential Liabilities
It is likely that Banespa may have an under-provision of retirement liability to the tune of some BRL 1.0 billion. However, Jaramillo believes Santander can limit the shortfall to BRL 120 million through a proper immunization strategy.[22] Additionally, Banespa’s non-performing loans (NPL) were approximately 36.1% for the fiscal year 1999; however, Banespa has made the necessary provisions of 150% to cover NPLs. [23]
Investment Considerations
Jaramillo’s secretary gives him a fax from Santander’s investment bankers describing their assumptions for Banespa’s future growth. Projected annual growth ranges from 12-24% and projected efficiency reductions decrease from 76% to 50% by 2003. (Refer to Exhibit 14 for details.) Then, he brainstorms additional factors, like the appropriate cost of capital, that his team will have to consider before deciding on their bid price for Banespa’s sealed bid auction. (Refer to Exhibit 15.)
Tax
Income tax for banks in Brazil is assessed at 15% of operating income with an additional 10% on their net income. There is also a federal tax called Social Contribution, which is assessed on total revenue at a rate of 3.65%. The overall tax rate for the banking sector has been about 35% historically.
A potential issue for Jaramillo is Banespa’s tax credits of BRL 2.2 billion, which are only valuable if Santander is able to generate sufficient earnings to benefit from the credits. These credits are more valuable to Brazil’s large, domestic banks.
Restructuring Costs
Banespa’s branches will need to be remodeled. Additional investment in technology will also be necessary to bring Banespa up to Santander’s service level in the Brazilian market. The overall cost per branch is estimated to be around BRL 350,000. [24]
In order for Santander to have efficiency gains, it will have to reduce Banespa’s personnel. Banespa has an average of 35 employees per branch, while the average for the largest domestic banks is 18. Since Banespa is state owned, the estimated layoff costs range from BRL 40,000 to BRL 50,000 per employee, above the domestic average of BRL 20,000.
Higher post-privatization tender offer
Jaramillo thinks that it may be more expensive for a foreign bank to tender for the outstanding floated minority shares. Since Santander will not consider a share swap, they must ensure that their tender offer acquires at least two-thirds of the outstanding shares in the market. With the employee shares and the existing market shares, this will be 70% of Banespa’s outstanding shares.
Judicial Deposits
After reading several analyst reports, Jaramillo has discovered that Banespa has BRL 2.8 billion in judicial deposits, which are escrows for companies with legal challenges. Since the current Brazilian law qualifies only state owned banks to maintain these accounts, there is a strong possibility that Banespa will lose the accounts after privatization.[25]
Conclusion
In late October 2000, Banespa stock price broke out of a recent moribund trading range despite an employee strike protesting its privatization. An analyst from Deutsche Bank is quoted as saying the following:
“We believe the stock is responding to three events 1) the relatively high price paid for Banestado by Itaú, 2) the recent position of the Supreme Court threatening to lift any delaying injunctions immediately, and 3) the public statements of Itaú and Bradesco citing serious interest.”[26]
The Banespa privatization represents a rare opportunity for both foreign and local banks to purchase a quality franchise in the Brazilian banking industry. Itaú paid a 300% premium above the minimum bid for Banestado on October 17, 2000. On the other hand, most interest from foreign banks appears to be fledging. Itaú has recently made massive investment outlays two weeks before. These factors are running across Jaramillo’s mind, as he waits for his investment advisory team to arrive for a meeting on Banespa’s valuation and their proposal for what Santander should bid.
Exhibit 1 – Brazil’s Political Map
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Exhibit 2 – Auction Rules
The Brazilian Auction Process for Bank Privatizations
The Brazilian auction process is managed and regulated by the Brazilian Central Bank. For bank privatizations, the Central Bank chose a hybrid auction model.
The objective of the auction is to the government owned bank to the highest bidder according to the following rules:
a) Each brokerage house will enter its client’s bid in a sealed envelope.
b) The Director of the auction will open the envelopes once all the envelopes were received. The bid and identification of all the participants will be disclosed.
c) After determining the highest bid and ensuring that the minimum price has been achieved, if the highest bid is over 20% greater than the second highest bid, the highest bidder wins the auction.
d) The participants whose bids fall within 20% of the highest bid advance to a live auction (open-bid system).
e) The bids will be made by the brokerage houses that are representing each of the participants. The minimum bid at this stage must be higher than the highest bid of the sealed-bid auction.
f) The winner will be the participant with the highest open-bid value.
g) In the case of not having the open-bid auction, the winner is the participant with the highest value in the envelopes. If there is a tie, the Director of the auction will proceed with a lottery among the participants who bid the same value.
Source: Brazilian Diario Oficial – (Official Diary)
Exhibit 3 – Banestado Auction Results
Exhibit 4 – Brazil in the World and in Latin America
Source: Brazilian Central Bank and various sources
Exhibit 5 – Brazil Inflation
Exhibit 6 – Economic Indicators
Exhibit 7 – Reserve Requirements in the World
Exhibit 8 – Recent M&A Activity
Exhibit 9 – Pending Privatizations
Exhibit 10 – Brazil Banking Rankings
Exhibit 11 – Book Value of Santander’s subsidiaries
Exhibit 12 – Balance Sheet
Exhibit 14 – Revenue and Cost CAGR
Exhibit 15 – Cost of Capital and Revenue Breakdown
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[1] O Globo, November 15, 2000, “Brazil: Citibank an BBVA quit Banespa tender,” p.21
[2] See Harvey, Lundblad and Valderrama, “Brazil in Crisis”, Spring 1999
[3] The Brazilian government had not yet released the final number for FDI inflows at the time of this case.
[4] One of the benefits of acquiring Banespa will be a waiver of the reserve requirements for a certain period of time. The Central Bank granted 18 month waivers to acquiring banks in previous privatizations. Analysts estimate that the present value of such a waiver for the Banespa acquisition is BRL 110 million.
[5] Morgan Stanley Dean Witter, “Brazilian Banks-Initiation of Coverage”, November 17, 2000, p.21
[6] Morgan Stanley Dean Witter, “Brazil Banks”, Nov 17, 2000, p.20
[7] Morgan Stanley Dean Witter, “Brazil Banks”, Nov 17, 2000, p.117
[8] CLSA Global Emerging Markets, “Latin America Morning Line”, July 17, 2000, p.1
[9] CABESP is a non-profit organization established by the banks’ employees that renders medical assistance to its beneficiaries. BANESPREV is the pension fund sponsored by the bank.
[10] The Brazilian government hired Booz-Allen & Hamilton to value Banespa. The consulting firm used three methodologies: DCF, Price Multiples, and Comparables. The minimum price of BRL 1.85bn includes a mark-up to compensate for the 50% discount that was granted to Banespa’s employees. This ensures that the minimum economic value of Banespa is guaranteed.
[11] On November 14, 2000, Banespa’s closing stock price was BRL 61.9.
[12] Point-of-sale
[13] Credit Suisse First Boston., “BSCH – The Growth-Profitability Dilemma”, Mar 20, 2000, pp.3-4.
[14] bsch.es, “Activity and Results, January to December 2000”, Jan 31, 2001
[15] Banco Santander Central Hispano, Quarterly Report, Jan-Dec 2000, p.44
[16] Efficiency ratio is defined by operating costs including SG&A / revenues
[17] Estimated by the case writers.
[18] bsch.es/pdf/comunicado_en.pdf, “Santander Central Hispano Launches Bid for Minority-Owned Shares in Banespa”, December 29, 2000, p5.
[19] UBS Warburg, “The Banespa Privatization: Remapping the Brazilian Banking Sector.” August 8, 2000, p. 11.
[20] bsch.es/pdf/sub_ban_en.pdf, “Santander Central Hispano Wins the Auction for Brazil’s Banespa”, Jan 31, 2001
[21] bsch.es/pdf/cc211100.pdf, “Acquisition of Banespa”, November 21, 2000, pp.24-25.
[22] CSFB, “Pan-Europe: Spanish/Banks - BSCH”, November 22, 2000, p.3.
[23] CLSA Global Emerging Markets, “Brazil: Banespa – Fully Provisioned!”, April 24, 2000, p.1.
[24] Mini-branches can be assumed as half a branch.
[25] UBS Warburg, “The Banespa Privatization,” August 8, 2000 p. 11.
[26] Deutsche Bank, “Banespa: Stock Breaking Out; Risk High”, November 1, 2000, p.1
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Source: IBGE
Source: Brazilian Central Bank
Source: Economist Intelligence Unit and banks forecasts
Source: Brazilian Central Bank
Inflation Post Real Plan
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