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Simón says

26 May 2015 By Rob Cox

Nearly two centuries ago, Simón Bolívar dreamed of uniting the liberated colonies of Latin America into a single, great nation. Brazil’s Itaú Unibanco espouses a similar strategy to create the first truly pan-Latin American regional bank. The $62 billion lender is learning, as Bolívar did, how difficult such unification is to achieve.

In January 2014, Itaú looked to be well on its way to establishing a Bolivarian banking behemoth when it struck what at the time appeared to be a clever deal to merge its sub-scale Chilean business with that of CorpBanca, to forge one of the country’s top institutions. The transaction is now backfiring in ways that may prove costly and embarrassing for Itaú.

CorpBanca and Itaú had agreed to combine their Chilean and Colombian businesses in an exchange of stock worth some $3.7 billion. Itaú would be the entity’s largest shareholder, with 33.6 percent. CorpGroup, the holding company of Alvaro Saieh, one of Chile’s richest men, was to retain a 33 percent stake.

While the industrial vision made sense – smaller banks uniting to create economies of scale under the aegis of the region’s biggest lender – it treated minority shareholders poorly. After all, control of CorpBanca was effectively being transferred to Itaú, including the naming of a majority of directors and the chief executive, without any premium being paid to them.

Some shareholders understandably made their displeasure known. Cartica Management, a Washington, D.C.-based asset manager, mounted a public campaign arguing Saieh’s group was receiving benefits from the deal worth about $1 billion, including a low-interest credit line and other perquisites from Itaú, which effectively shortchanged minority shareholders.

Cartica took its case to courts in New York and Chile. The uproar eventually got the attention of the World Bank, which through its private-sector lending arm, the International Finance Corp, owned 5 percent of CorpBanca. Last July, the multilateral lender hired Lazard to provide an independent analysis of the Brazilian bank’s proposed union with CorpBanca.

None of the maneuvers derailed the deal. In December, the World Bank indicated it would back the transaction because it was “consistent with our original investment strategy and will create an even stronger regional financial player in Latin America, with more capacity to support companies and access to finance in the region.” These challenges did, however, delay approval that was originally envisioned for late 2014.

And that’s where it got troublesome for Itaú. Since hashing out the agreement, the fortunes of CorpBanca and Itaú in Chile have diverged. According to Itaú’s annual report – where it states “our purpose is to be recognized as the “Latin American Bank” – profitability at its Chilean division declined in the fourth quarter. Return on equity tumbled to 7.9 percent from 13.3 percent in the previous quarter, and net income fell 37 percent.

Over at CorpBanca, thanks in large part to the growing contributions of its Colombian assets, consolidated profit in the comparable quarter increased 21 percent. Adjusted net income at its Chilean arm also rose by a similar clip at the end of last year, though first-quarter results released Monday showed a deterioration. Still, CorpBanca’s overall improved fortunes reflect a reduction in funding costs arising from the proposed merger, as Moody’s Investors Service put CorpBanca’s debt rating on review for a possible upgrade last year.

Whatever the case, CorpBanca argues that Itaú’s Chilean business is worth about $1 billion less than it was when they struck the deal. It says CorpBanca accounted for about 72 percent of the combined company’s pro forma 2014 profit, up from 66 percent when first proposed, and rising. Therefore, to ensure the Brazilian bank led by Roberto Setubal emerges with its controlling stake, Saieh wants more money.

Itaú has already offered financial concessions, in the form of an extra $300 million dividend to be paid by CorpBanca to its shareholders before consummating the union, and a reduced payment to its own investors of just $43.5 million, so long as the transaction is put to a vote before the end of June. That isn’t enough for Saieh, however, who hired Citigroup to draft a new fairness opinion, to determine the appropriate exchange ratio, due later this month.

These two erstwhile partners, who hatched a sweetheart deal that left minority investors holding the bag, are now effectively at war. Moreover, it could be argued that the braying of those aggrieved investors postponed the closure of the union that now has the two sides engaged in financial fisticuffs. Strangely enough, if the deal blows up, it’s those minority holders like Cartica and the World Bank that will feel the pain.

Itaú’s grand Bolivarian plan isn’t necessarily doomed. Though it can call off the deal – and potentially try to claim a break fee – the overall logic stands. And with Itaú last week selling a $1 billion bond, the first big offering by a Brazilian company in global markets in six months, it may have the money it needs to pay more, and keep trying to achieve what Bolívar could not.


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