Brazil Markets: Private Equity Sets Sights on Latin America

Brazil’s main equity index, the Bovespa, has been moving sideways so far this week, down 0.48%. A month-long look at the Bovespa shows flat trading as well down 1.36% and for the year, Brazil’s Bovespa is down some 5.59%.

Checking the headlines, I found an interesting story about Petroleo Brasileira (Petrobras) (PBR), Brazil’s quasi-government-owned oil company that has reserves possibly greater then those of Russia or Kuwait. The only problem with Petrobras' reserves is that they're undeveloped and lie under layers of salt hundreds of miles offshore and at great depths. Therefore Petrobras needs to raise capital through share issuance to retrieve the oil. The capex plan will cost $224 billion, and Petrobras plans to issue $75 billion in stock ($42.5 billion to the government in exchange for 5 billion barrels of proven oil reserves, and the rest to the public in a global share offering).

One of the biggest concerns about the Petrobras deal is that shares are down over 20% this year (local currency) while the Brazilian market has been flat and the price of oil has risen. In addition, investor sentiment toward the government's involvement in the deal has been described as lukewarm at best, as investors are complacent over the proposed payment of reserves.

Elsewhere, Brazilian investors Jorge Paulo Lemann, Marcel Telles, and Carlos Alberto Sicupira of the private equity firm 3G Capital, had their $3.25 billion bid for Burger King (BKC) accepted. The deal values Burger King at $24 per share and almost 18 times 2011 earnings. The investment group, which is known for investing in consumer brands, plans to bring the Whopper to Latin America. Of all the Burger Kings in the world, only one in 10 are currently in Latin America -- far less then rival McDonald’s (MCD). Expect the number of outlets to increase as the King makes its way to Rio.

Another private equity fund, Actis has its eyes on the Brazilian consumer as well. The company just made its initial move into Brazil by investing $58 million in Companhia Sulamericana de Distribuicao -- a company that operates popular Brazilian supermarket chains.

It’s no surprise that Actis and 3G Capital are jumping into the relatively untapped Brazilian consumer markets. Country data shows that domestic consumption will make up 60% of GDP, which analysts see growing by 7% this year.

The only headwind facing Brazil as of right now is the presidential election, which is on course to end on October 3. A country-wide opinion poll sees Dilma Rousseff of the ruling left-wing winning by 18 points against Jose Serra of the centrist opposition PSDB (the Brazilian Social Democracy Party). Just like the way US markets trade higher once an election is complete, the Bovespa may be able to levitate higher as well.

Further Reading:
 

• The largest maker of glass bottles, Owens-Illinois (OI) is expanding into Brazil.
  
  
• Brazil’s Hollywood-style movie boom.
  
  
• Brazil’s sugar industry is producing food, fuel which is benefiting the environment. How fast can it grow?
  
  
• The latest M&A boom hits Brazil’s advertising agencies.
  
  
• Axxon Private Equity Group is planning to raise $290 million to invest in local Brazilian companies.