Until recently, the ownership structure of many privatized Brazilian companies closely resembled a plate of spaghetti. Complex cross-shareholdings, a maze of holding companies, subsidiaries and special purpose vehicles bred conflicts of interest. Fractious shareholdings led to squabbling between shareholders and weak management.
Companhia Vale do Rio Doce (CVRD), the mining and transportation giant the government privatized in 1995, was the largest and most visible victim of this syndrome. For several years it was not even clear who really owned and managed the company. Benjamim Steinbruch, the entrepreneur who for a time was CVRD’s principal shareholder, was also the boss at one of the company’s main clients and shareholders, the privatized steelmaker Companhia Siderúrgica Nacional (CSN). It was clear that toppling CVRD’s untenable ownership structure and creating a new, more stable one in its place would be a long and daunting undertaking. Few could have imagined that it would take 30 months and consume the energy of teams of bankers, lawyers, consultants, government regulators, politicians as well as executives from the companies involved.
Reorganizing CVRD’s structure would require the simultaneous unwinding of the cross-shareholdings between its owners and those of the Vicunha group, the Steinbruch family’s highly leveraged vehicle that controlled CSN. This apparently simple restructuring – exchanging shares in CVRD for those in CSN – in fact proved on an extraordinarily difficult process. Those involved had to overcome mutual mistrust and deal with boardroom power struggles while they designed, financed and executed a deal of mind-bending complexity that only ended in March 2001.
The successful completion of the deal by bankers from JP Morgan, Santander Central Hispano, Worldinvest and Projeta in Brazil takes LatinFinance’s prize for corporate restructuring of the year.
In addition to Vicunha, CVRD had two other main shareholders: Banco Bradesco, the country’s biggest private-sector bank, and Previ, the pension fund of Banco do Brasil, the state-owned commercial bank. CVRD in turn held an indirect minority stake in CSN. JP Morgan advised Previ and Bradespar, a holding company Bradesco had created to hold its industrial investments, in the $2.5 billion transaction.
This operation involved selling their 31.7% stake in CSN for $1.18 billion to Vicunha and acquiring CSN’s 31.2% interest in Valepar, the entity that controls 42% of CVRD’s voting stock for $1.31 billion. Ultimately, Previ and Bradespar became joint controlling shareholders of CVRD through Valepar, and Vicunha took control of CSN by raising its stake to 46% from 14%. In addition, CVRD’s pension fund Valia acquired the 10% stake in CSN previously held by Docepar, a Vale subsidiary.
Pedro Rodrigues, the JP Morgan banker who worked on the transaction, says he initially had to make sure his clients, Previ and Bradesco, agreed on their goals. “The first question was to align the objectives of Previ and Bradesco,” he says. “An agreement [had to be] negotiated between Previ and Bradesco, but it took a very long time and it was very complex.” Both also had to agree with minority investors in each of the special purpose vehicles they had set up to own their shares in Valepar. Previ had to negotiate with other state company pension funds. Bradesco had to win support from its ally, the Rio de Janeiro investment firm Opportunity.
At the same time, the players were locked in a power struggle. CVRD is one of the largest and most lucrative companies in Brazil. Agreeing which group of investors would control which part of the company involved highly political negotiations. The shareholders resolved this by giving the presidency to Bradespar and the chairmanship to Previ.
The next critical stage in the process was for Bradespar and Previ to assume a $500 million put option held by foreign financial investors and international mining companies. If these talks had failed the entire operation could have unraveled. These mainly foreign investors owned a vehicle called Sweet River which had a put option to sell its 12% stake in Valepar, the company that controls CVRD, to CSN at any time between May 2002 and May 2004. In July 2000, the Australian mining group BHP, a competitor of CVRD, added a further level of complexity to the process when it acquired a 2.1% stake in Sweet River. This gave it preemptive rights to acquire stock from other Valepar shareholders. Once again, these rights – and those of other shareholders – had to be bought out.
At the same time, bankers had to line up financing for Vicunha’s acquisition of CSN shares. Without any financing for Vicunha, the whole deal again threatened to unravel. But BNDES, the government development bank and only source of long-term real-denominated financing in Brazil, refused to lend Vicunha the full amount it needed. Instead, it demanded that Vicunha carry out a capital markets operation. Vicunha accordingly issued a debenture equivalent to $957.5 million, which BNDES, Previ, Bradespar and the public bought. Only when the debentures were placed could the deal finally close and in March 2001, CSN and CVRD went their separate ways.