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MinorityshareholdersinBrazil

Hopping
Abigbrewingmergerpromptsarethinkingofshareholders'rights

Mar 25th 2004 | SO PAULO | From the print edition

WHEN AmBev, South America's largest brewer, and Belgium's Interbrew toasted the birth of
the world's biggest beer company this month, not everyone raised a glass. As part of a
complicated deal AmBev, which will keep its Brazilian listing, will buy Interbrew's North
American operationsexpensively, say critics. Holders of ordinary AmBev shares get to swap
them for Interbrew stock, probably at a generous premium. Investors with non-voting
preference shares do not; as a result, these investors believe that they have been landed with
high-priced junk. The reputation of Brazil's capital markets could be seriously damaged by the
deal, warned the investment director of Previ, a big pension fund.
The risk of discrimination is built into Brazil's stockmarket law, which resembles Italy's more
than America's or Britain's. Two-thirds of a company's equity can be in the form of non-voting
preference shares, called PNs. A stake of less than 17%ie, a majority of the ordinary shares, or
ONscan be enough to exercise control.
Nearly all of the 365 firms listed on the Bovespa, the stock exchange, have a controlling
shareholder, who generally wields near-absolute power despite a smallish financial stake. In the
United States and Britain, points out Cristiano Souza of Dynamo Asset Management, conflicts
over corporate governance tend to arise between managers and widely dispersed shareholders;
in Brazil they pit strong owners against weak investors. But the balance is starting to shift.
Until recently, no one thought much about voting rights. Investors' main worry in a volatile
emerging market like Brazil is the capacity to buy and sell quickly. PNs trade at a premium to
ordinary shares not so much because they pay higher dividends and have prior claim on the
assets of a bankrupt enterprise but because they are more liquid.
Lately the drawbacks of owning PNs have become more apparent. AmBev's tie-up with
Interbrew saw its ONs soar in value while the price of PNs has dropped by 30% (see chart). Last
year investors in Telemar, one of Brazil's main regional phone monopolies, were enraged when
the holding company sold the group's cellular business to the operating company at a price most
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Hopping | The Economist

analysts considered exorbitant. Such incidents have been a wake-up call for investors that just
run after liquidity, says Mauro Cunha of Bradesco Templeton, a corporate-governance fund.
Investors and companies are both paying attention.
Over the stockmarket as a whole, the premium of
PNs over ONs has shrunk, showing that investors are
beginning to prize voting rights. On March 23rd
AmBev belatedly offered to buy back some of its PNs.
Companies eager to reduce their cost of capital are
catering more to minority shareholders. Marco Polo,
a large coach-builder, managed to issue shares a
month before the presidential election in 2002, a
time of intense gloom about Brazil's prospects, by
listing on Bovespa's level 2, where PN holders get
rights to piggyback on takeovers and limited voting
rights. Around 30 other, mostly fairly small companies have conceded similar rights to PN
investors.
This trickle should grow. Falling interest rates and an economic recovery are expected to tempt
half a dozen companies to list their shares this year, including Natura, a cosmetics company, and
Gol, Brazil's discount airline. These are thought to be a new breed, willing to share control in
order to raise capital more cheaply. Most are expected to list on level 2 or even on the novo
mercado, which allows only ONs (and currently contains just two companies). If that happens,
Brazilian shares will begin to taste fizzier.

From the print edition: Finance and economics

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