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Latin America: Europe's Pillar of Strength

January 22nd, 2013

by Team

of Thomas White International

European firms are shaking off pressure at home through various business transactions in Latin America.

A tango or samba with Latin America seems to be what the doctor has ordered for the ailing European economy.

In December, the European Parliament ratified free trade deals with Colombia, Peru, and six other Central American nations. This is the latest evidence of how Europe has been leaning on Latin America for support since the beginning of its difficulties nearly three years ago. Historically, Europe has had deep economic connections with Latin America, starting from the early days of colonization.

Right from the time of the so-called “re-conquest” in the 1990s when European companies began investing heavily in Latin America, the European Union (EU) has been Latin America’s second biggest trading partner after the U.S.

Now, companies based in Europe, especially Southern Europe, are shaking off part of the pressure at home through various business transactions in Latin America. Some are divesting their valuable LATAM assets to raise capital to support their struggling businesses at home, while the stronger ones are expanding their LATAM subsidiaries or investing heavily in local firms to capitalize on the significantly better growth opportunities in Latin America.

For instance, Italy’s biggest builder Impregilo is selling its 19 percent stake in a Brazilian toll-road operator for €765 million, which will enable it to wipe out its debt. The world’s No. 2 retailer by sales, France-based Carrefour sold its Colombian business in October 2012 to raise $2.5 billion.

Many Portuguese and Spanish companies, which initially expanded into Latin America merely for a global presence, are now deepening their footprints. In fact, in 2011, Spain became the second largest European investor in Latin America, pouring nearly $18 billion into LATAM companies. Indeed, Spain's largest bank Santander is a fine example of how balance sheets are being strengthened by unlocking the value of earlier investments in Latin America. In 2009, Santander famously raised $7 billion by launching the IPO of its Brazilian subsidiary and in October 2012, it filled its coffers with another $4 billion by repeating the move in Mexico.

Similarly, Abengoa, a Spanish engineering and chemical firm that is struggling to pay off heavy bank loans, is raising finances through asset sales in Chile and Peru. Another Spanish construction group Obrascón Huarte Lain has entered into a complex financial deal with Spanish peer Abertis Infraestructuras in an effort to cash in on the value of its Brazilian toll-road subsidiary.

Notably, this debt crisis-inspired spurt in deals and investment is proving to be a win-win situation for both the regions. For instance, the recent free trade deal is expected to not just boost Europe’s export of luxury goods, cars, and chemicals to LATAM economies but also allow countries like Colombia and Peru to increase their export of minerals and farm produce to European nations. The Financial Times has quoted the European Commission as saying that the deal will help EU exporters to LATAM save at least $325 million a year in duties within a decade.

Interestingly, while debt-ridden European companies are selling LATAM businesses to raise cash, Latin American firms are steadily expanding their assets. In 2011, Colombian conglomerate Grupo Saura bought European financial services firm ING’s pension fund management business in several LATAM countries for $3.6 billion. In fact, that year, 5 of the 10 biggest Latin American deals involved the acquisition of businesses from European companies. According to the Financial Times, Mexican companies have been expanding so rapidly that commentators now call it the Mexican ‘reconquista’.

Indeed, rapid globalization over the past two decades has blurred economic boundaries. Today, one country’s weakness is another country’s opportunity, but companies in weak economies are also benefiting from their presence in the stronger ones. Clearly, both European and Latin American firms have understood this well.

This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.

FORWARD LOOKING STATEMENTS

Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.

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