Buildin a Better Base

Organizações Globo is the best-known and most influential company in Brazil. It owns the dominant TV broadcaster, a chain of news and pop music radio stations across the country, including Rio de Janeiro’s best newspaper, O Globo. The company came to the attention of international financial markets some time ago when its finances began to come unstuck. Globo’s basic problem is that its revenues are in local currency but it must pay for expensive content with hard currency. Its debts are also in mainly dollars: it has $1.26 billion in bonds and another $200 million in loans outstanding, according to Dealogic, a capital markets database. Globo controls more than 75% of the Brazilian TV advertising market, but suffers when both advertising revenues and the currency fall, as they have in the last two years. To make matters more difficult, most of the group remains the personal property of Rio de Janeiro’s Marinho family, so Globo’s access to the capital markets is limited further still because it is a privately held company.

The appointment early this year of Philippe Reichstul as the new CEO of GloboPar, the company that raises financing for Globo, marks a milestone in the group’s struggle to return to health. Coincidentally, Congress recently abolished the requirement that media companies like Globo had to be owned by individuals. Such companies can now incorporate and sell stock to Brazilians and foreigners alike. Reichstul worked wonders at Petrobras, the national oil company. As CEO, he instilled the profit motive into a bureaucratic machine, introduced financial controls and led Petrobras to a $4.1 billion listing on the New York Stock Exchange in 2000. The Marinhos hope Reichstul will work the same magic as he restructures GloboPar.

Reichstul’s first task at Globo was to deal with the group’s listed cable TV subsidiary, Net Serviços de Comunicação, which boasted a 1,162% leverage ratio in June. It has now restructured $200 million in debt and raised $330 million in fresh equity. Reichstul says that Net’s financing is “guaranteed until the end of 2003, it has been recapitalized, the company has new management and the market will grow.”

With Net’s immediate problems out of the way, Reichstul has to concentrate on sorting out Globo. “The new media law will allow restructuring of the group and the creation of Globo SA is in its final stages,” he says. Next year, all being well, he says Globo plans to go public. Private Brazilian companies tend to avoid the public markets wherever possible to avoid sharing control with investors, disclosing information to competitors and tax collectors, or turning management over to professionals. But Globo’s financial problems have forced it to revamp its capital structure. Reichstul says, “There will be an IPO at the end of 2003. We have US GAAP and set up a controller. The idea is to adjust the capital structure and debt ratios to a sufficient level. Control by the family will continue. That is a predefined value.” The goal is to sell enough equity to local and international investors to rebuild the balance sheet without threatening the family’s control. Says Reichstul, “We want to keep the operating companies’ autonomy and at the same time seek financial synergy and disciplines. We will monitor returns on investment. We will be the board’s instrument to approve investments, divestments, and to control the budget.”

However, Globo has to avoid drifting heavily into debt again. This is why Reichstul says he wants to increase exports. This would create additional, hard currency revenues, which would improve GloboPar’s creditworthiness, especially after Moody’s downgraded its debt to B3 from B1 in August. “We are going to sell soaps to Telemundo. We want to place more content in the Hispanic market and at this exchange rate, exports are very good.”