Privatization in the Privatization in the Brazilian Banking SectorBrazilian Banking Sector
Tadeu Nunes
Marcio Passos
Diane Nakayama-Shapiro
Terence Tong
Debbie Vann
AgendaAgenda
IntroductionIntroduction Brazil’s EconomyBrazil’s Economy Brazil’s Banking SectorBrazil’s Banking Sector BanespaBanespa Potential BiddersPotential Bidders Our valuationOur valuation Post MortemPost Mortem
IntroductionIntroduction Brazil’s EconomyBrazil’s Economy Brazil’s Banking SectorBrazil’s Banking Sector BanespaBanespa Potential BiddersPotential Bidders Our valuationOur valuation Post MortemPost Mortem
EconomyEconomy
BrazilBrazilBrazil
• 8th largest economy in the World
• 53% of Latin America’s GDP
• 170 million inhabitants
São Paulo
• 35% of Brazil’s GDP
• 36 million inhabitants
Brazil: EconomyBrazil: Economy
BackgroundBackground Recent HistoryRecent History
– Real Plan Real Plan introduced in 1994introduced in 1994– Currency devalued in Jan. 1999Currency devalued in Jan. 1999
ForecastForecast– GDP growth at 4-4.5% for next 3 yearsGDP growth at 4-4.5% for next 3 years– FX Rate stable (market forecasts)FX Rate stable (market forecasts)– Presidential Elections in 2002Presidential Elections in 2002– Still with the “Emerging Markets” labelStill with the “Emerging Markets” label– Rating is B1 by Moody’s and BB- by S&PRating is B1 by Moody’s and BB- by S&P
Montlhy Inflation in Brazil (%)
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Jun
-89
Jun
-90
Jun
-91
Jun
-92
Jun
-93
Jun
-94
Jun
-95
Jun
-96
Jun
-97
Jun
-98
Jun
-99
Jun
-00
IGP-M CPI
Brazil: InflationBrazil: Inflation
Long history of high inflation and not successful economic plans
Monthly Inflation Post Real Plan
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
Aug-9
4
Dec-9
4
Apr-9
5
Aug-9
5
Dec-9
5
Apr-9
6
Aug-9
6
Dec-9
6
Apr-9
7
Aug-9
7
Dec-9
7
Apr-9
8
Aug-9
8
Dec-9
8
Apr-9
9
Aug-9
9
Dec-9
9
Apr-0
0
Aug-0
0
IGPM CPI
Since the Real Plan inflation has been under control, reaching very low average yearly inflation (5%)
IntroductionIntroduction Brazil’s EconomyBrazil’s Economy Brazil’s Banking SectorBrazil’s Banking Sector BanespaBanespa Potential BiddersPotential Bidders Our valuationOur valuation Post MortemPost Mortem
Banking SectorBanking Sector
Brazilian Banking SectorBrazilian Banking Sector
FederalFederal– Owns the 2 largest Brazilian InstitutionsOwns the 2 largest Brazilian Institutions
State OwnedState Owned– Each state used to have its own “financial institution”Each state used to have its own “financial institution”
– Vast majority have been privatizedVast majority have been privatized
PrivatePrivate– Largely dominated by 3 Brazilian institutionsLargely dominated by 3 Brazilian institutions
– Over 70 foreign banksOver 70 foreign banks
Brazilian Banking SectorBrazilian Banking SectorBanking Sector by Assets
Private Banks – 52%
State Banks – 48%
Bradesco, Itau & Unibanco – 20%
Foreign Institutions – 23%
Others – 9%
Most Recent TransactionMost Recent Transaction Banestado, on Oct 20Banestado, on Oct 20thth
– Largest privatization to dateLargest privatization to date– Set the stage for Banespa’s Set the stage for Banespa’s
auctionauction– 377 branches, 92% in Parana 377 branches, 92% in Parana
StateState
– 550,000 clients550,000 clients Metric USD MM
Equity 248 Auction Price 878 P / BV 4 P / Branch 2.65 P / Client 1,815 Customers 550 Branch Coverage 573 (92% in Parana State)
Most Recent TransactionMost Recent Transaction
Banestado Auction
384
676
819 824 851 854 878
200300400500600700800900
1000
US
D M
illi
on
Had Itau paid USD 846 (USD 27 million more), they would have saved USD 32 million by avoiding the “live auction”
Sealed Bid Live Auction
Recent M&A ActivityRecent M&A Activity
Over 40 transactions since 1995.
IntroductionIntroduction Brazil’s EconomyBrazil’s Economy Brazil’s Banking SectorBrazil’s Banking Sector BanespaBanespa Potential BiddersPotential Bidders Our valuationOur valuation Post MortemPost Mortem
BanespaBanespa
Banespa’s vital statisticsBanespa’s vital statisticsLargest state owned bank and 5th largest in Brazil in Deposit
Share and 40th “largest” in Net Income
Bank Asset Share Deposit Share # Branches # Employees
Banespa 3.70% 3.50% 571 20,098 Bradesco 10.3% 11.6% 2,438 47,521 Itau 6.7% 7.2% 1,674 29,982 Unibanco 4.6% 2.9% 701 N/ABoston 2.3% 0.9% 64 4,178 Citibank 1.7% 0.5% 51 1,978 HSBC 1.7% 2.0% 981 18,845 Santander 1.6% 1.2% 180 4,248
Source: Morgan Stanley Dean Witter, Nov 17 2000
PrivatizationPrivatization
November 20, 2000November 20, 2000
Rio de Janeiro Stock ExchangeRio de Janeiro Stock Exchange
60% voting capital x 30% total capital60% voting capital x 30% total capital
BRL 1.85 billion (USD 990 million)BRL 1.85 billion (USD 990 million)
IntroductionIntroduction Brazil’s EconomyBrazil’s Economy Brazil’s Banking SectorBrazil’s Banking Sector BanespaBanespa Potential BiddersPotential Bidders Our valuationOur valuation Post MortemPost Mortem
CompetitionCompetition
Potential BiddersPotential Bidders
IntroductionIntroduction Brazil’s EconomyBrazil’s Economy Brazil’s Banking SectorBrazil’s Banking Sector BanespaBanespa Potential BiddersPotential Bidders Our valuationOur valuation Post MortemPost Mortem
What is a reasonable bid?What is a reasonable bid?
Cost of CapitalCost of Capital
Risk AdjustmentsRisk Adjustments– Concentration riskConcentration risk– Government bond portfolioGovernment bond portfolio– Exposure to inflation and FXExposure to inflation and FX
ICCRC Sept 2001Country rE 23.8%Modify:
Bank risk -4.0%Forex and inflation risk -3.0%
rE* 16.8%
rD 7.0%Target D/V 78%
TC 35.0%WACC 7.2%
Valuation (USD)Valuation (USD)
Frequency Chart
.000
.006
.013
.019
.025
0
6.25
12.5
18.75
25
4,048,543 4,576,120 5,103,696 5,631,273 6,158,850
1,000 Trials 7 Outliers
Forecast: After Size Premium Equity Value
Frequency Chart
.000
.006
.012
.018
.024
0
6
12
18
24
3,527,087 4,040,848 4,554,609 5,068,370 5,582,131
1,000 Trials 6 Outliers
Forecast: Base BESP Equity Value
Some +ve skew
(million)FCF Residual Income
Base BESP 12,458.702 4,474.920 Size Premium 544.313 544.313 BESP Value to Santander 13,003.014 5,019.233 Adj. P/BV 5.07 1.96
Revenue & FXRevenue & FX
Frequency Chart
.000
.007
.014
.020
.027
0
6.75
13.5
20.25
27
1.90 2.17 2.43 2.69 2.95
1,000 Trials 42 Outliers
Forecast: Forex BRL/USD 2005
Frequency Chart
.000
.007
.013
.020
.026
0
6.5
13
19.5
26
1,051,529 1,193,242 1,334,956 1,476,669 1,618,382
1,000 Trials 14 Outliers
Forecast: General Credit Rev enue 2005
Revenue upside potential, and capped downside to reflect growth opportunity
Inflation effects in model seen in the exchange rate distribution
Sensitivity Analysis (USD)Sensitivity Analysis (USD)
rE16.00% 16.80% 18.00% 19.00% 20.00%
Size 90% 5,640.846 5,174.751 4,561.749 4,113.857 3,711.652 Premium 80% 5,563.087 5,096.992 4,483.990 4,036.098 3,633.893
Probability 70% 5,485.329 5,019.233 4,406.232 3,958.339 3,556.134 60% 5,407.570 4,941.474 4,328.473 3,880.580 3,478.375 50% 5,329.811 4,863.715 4,250.714 3,802.821 3,400.617
(million)
Valuation Matrix (BRL)Valuation Matrix (BRL)
What would you bid?
(million)Stage 1 Stage 2Auction P/BV Minority Shares Premium P/BV
30% 70%8,215.024 5.70 1,572.480 0% 0.47 7,900.528 5.49 1,886.976 20% 0.56 7,586.032 5.27 2,201.472 40% 0.66 7,271.536 5.05 2,515.968 60% 0.75 6,957.040 4.83 2,830.464 80% 0.84 6,642.544 4.61 3,144.960 100% 0.94 6,328.048 4.39 3,459.456 120% 1.03
So, what happened?So, what happened?
BBVA, Citibank, Fleet Boston,Itau & BBVA, Citibank, Fleet Boston,Itau & HSBC did not submit bidsHSBC did not submit bids
Bradesco bid BRL 1.86 billionBradesco bid BRL 1.86 billion Unibanco bid BRL 2.10 billionUnibanco bid BRL 2.10 billion
Santander bid BRL 7.05 billion – Santander bid BRL 7.05 billion – 281% premium over reserve price281% premium over reserve price
Valuation Matrix (BRL)Valuation Matrix (BRL)
What was the bid?
(million)Stage 1 Stage 2Auction P/BV Minority Shares Premium P/BV
30% 70%8,215.024 5.70 1,572.480 0% 0.47 7,900.528 5.49 1,886.976 20% 0.56 7,586.032 5.27 2,201.472 40% 0.66 7,271.536 5.05 2,515.968 60% 0.75 6,957.040 4.83 2,830.464 80% 0.84 6,642.544 4.61 3,144.960 100% 0.94 6,328.048 4.39 3,459.456 120% 1.03
Santander RationaleSantander Rationale
Project AmericaProject America– Sao Paulo is key to project success and Sao Paulo is key to project success and
they have very little presence in the region.they have very little presence in the region. Banespa is a “perfect match” for the Banespa is a “perfect match” for the
current Santander branch networkcurrent Santander branch network
Location & # of branchesLocation & # of branches
Number of BranchesBSCH Banespa New BSCH Bradesco Itau Unibanco
Sao Paulo 145 531 676 885 500 314 Rio de Janeiro 25 10 35 226 267 191 Minas Gerais 14 4 18 253 532 87 South 149 15 164 348 498 107 Other States 16 13 29 763 164 106
Total 349 573 922 2,475 1,961 805
Santander RationaleSantander Rationale
Project AmericaProject America– Sao Paulo is key to project success and they have Sao Paulo is key to project success and they have
very little presence in the region.very little presence in the region. Banespa is a “perfect match” for the current Banespa is a “perfect match” for the current
Santander branch networkSantander branch network
If they did not acquire Banespa, they If they did not acquire Banespa, they would lose the best growth opportunity would lose the best growth opportunity
Control premium to ensure priority on Control premium to ensure priority on minority share tenderminority share tender
Market ReactionMarket Reaction
Santander
Auction Date
IBEX – Madrid Index
Q&AQ&A
Market ReactionMarket Reaction
Banespa Auction date
Expected synergiesExpected synergies
Efficiency Ratios
0
5
10
15
20
25
30
35
40
45
Peer Brazil Banespa BSCH Brazil BSCH Latam
num
ber o
f em
plo
yee
s
0%
10%
20%
30%
40%
50%
60%
70%
80%
Efficiency Employee
Minority sharesMinority shares
January 2, 2001January 2, 2001– Santander tendered offer of BRL 2.5 billionSantander tendered offer of BRL 2.5 billion– 58.6% premium over December 2858.6% premium over December 28thth
closing priceclosing price– Expected close in March-April 2001Expected close in March-April 2001