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Cablegate: Brazilian Stock Exchanges Bovespa, Bm&F in Merger Talks

VZCZCXRO8975
RR RUEHRG
DE RUEHSO #0115/01 0671743
ZNR UUUUU ZZH
R 071743Z MAR 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 7978
INFO RUEHBR/AMEMBASSY BRASILIA 9125
RUEHRG/AMCONSUL RECIFE 4031
RUEHRI/AMCONSUL RIO DE JANEIRO 8625
RUEHBU/AMEMBASSY BUENOS AIRES 3083
RUEHAC/AMEMBASSY ASUNCION 3331
RUEHMN/AMEMBASSY MONTEVIDEO 2636
RUEHSG/AMEMBASSY SANTIAGO 2332
RUEHLP/AMEMBASSY LA PAZ 3741
RUCPDOC/USDOC WASHDC 3046
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000115

SIPDIS

SIPDIS

STATE PASS USTR FOR KDUCKWORTH
STATE PASS EXIMBANK
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE
DEPT OF TREASURY FOR JHOEK

E.O. 12958: N/A
TAGS: ECON EFIN EINV BR
SUBJECT: BRAZILIAN STOCK EXCHANGES BOVESPA, BM&F IN MERGER TALKS

REF: 07 SAO PAULO 0899

1. SUMMARY: Bovespa Holding, the company that controls and manages
the Sao Paulo Stock Exchange, and Brazil's Commodities and Futures
Exchange (BM&F) informed Brazil's Securities Commission (CVM) and
investors on February 19 that the two companies had initiated
negotiations for a possible merger, but stressed that a deal had not
yet been reached. Their press statement said the two sides would
announce the results within 60 days. A merger would make the
resulting company the second largest exchange in the Western
Hemisphere behind the Chicago Mercantile Exchange (CME). In
addition to optimizing costs and increasing profits and reliability
for investors, the merger could potentially boost investor
confidence and attract more foreign investment. The proposed merger
is another example of companies taking advantage of the current
strength of the Brazilian economy to make long-term decisions that
should reap long-term benefits. END SUMMARY.

2. On February 19, Bovespa Holding and Brazil's Commodities and
Futures Exchange (BM&F) issued a statement to investors and the
Securities Exchange Commission (CVM) that the two had initiated
formal talks for a merger. Neither Bovespa Holding Chief Executive
Gilberto Mifano nor BM&F Chief Executive Edemir Pinto has guaranteed
that any agreement will be reached from these discussions. Both
noted that the two companies will not give any further information
before the end of the sixty-day period, during which both parties
are restricted from initiating transactions with third parties.
Press reports indicate that the two companies want to follow what
the Chicago Mercantile Exchange (CME) did in 2007 when it merged
with the Chicago Board of Trade, a step towards consolidating the
world's stocks and futures exchanges.

3. The latest announcement follows last year's phenomenal stock
performance and the initial public offerings (IPO) of both
companies. Bovespa Holding raised USD 3.8 billion in October with
its IPO, which was Brazil's largest ever (Ref). BM&F then
accumulated USD 3.4 billion in its IPO only a month later.
Following their IPOs, the stock prices of both institutions climbed
52 and 22 percent respectively in 2007; however, in the first two
months of 2008 both stocks had dropped back down to their IPO price
ranges. The market has reacted positively to the merger news with
both companies' stocks climbing approximately ten percent each.

4. Trading volume has expanded strongly in recent years on both
exchanges as international investors have moved into emerging market
assets. The consulting firm Economatica estimated the combined
value of the merger at USD 18.5 billion, surpassing the New York
Stock Exchange (NYSE). Their current estimate is that Bovespa alone
is worth USD 10 billion, well above many emerging market exchanges.
For example, the Indian exchange is currently valued at USD 1.2
billion and the Chinese exchange at USD three billion. (Note: In
October of 2007, prior to BM&F's IPO, the CME took a 10 percent
stake in BM&F for two percent of CME. BM&F is the fourth largest
futures exchange in the world in terms of contracts negotiated. End
Note.)

5. The press and local financial interlocutors underscored the
benefits of a merger which include reduced operating and
administrative costs, as well as facilitation of shares and futures
trading. They also point to a reduced workforce and the potential
to leverage business synergies. Mauricio Oreng from Itau Bank told
Econoff that the merger would be a net positive for Brazil's
economy, and would elevate Brazil's role in world financial markets
as well as potentially leading to regional consolidation of stock
exchanges. Oreng opined that the merger would attract more foreign
investment because Brazilian markets are well regulated and
investors are enthusiastic about merger negotiations. Professor
Alcides Leite from the Trevisan Business School said that the merger
would provide the market with another very liquid and credible
asset. The Vice President for Treasury Operations Julio Sequera
told Econoff that the merger would leverage economies of scale and
existing synergies, however, that the merger depended on market
conditions to succeed. He expects the merger talks to result in a
unification of the two exchanges.

6. COMMENT: The proposed merger of Brazil's largest exchanges looks

SAO PAULO 00000115 002 OF 002


set for a warm reception from shareholders who expect to benefit
from cost savings and lower trading fees. This is yet another
example of how Brazil's strong economic performance is changing
private sector investment and business strategies from reacting to
short-term situations to making long-term decisions. END COMMENT.

7. This cable has been cleared by the Embassy in Brasilia.

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