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Cablegate: Brazilian Stock Exchanges Get Green Light for Merger

VZCZCXRO1080
RR RUEHRG
DE RUEHSO #0214/01 1201548
ZNR UUUUU ZZH
R 291548Z APR 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 8166
INFO RUEHBR/AMEMBASSY BRASILIA 9296
RUEHRG/AMCONSUL RECIFE 4081
RUEHRI/AMCONSUL RIO DE JANEIRO 8691
RUEHBU/AMEMBASSY BUENOS AIRES 3123
RUEHAC/AMEMBASSY ASUNCION 3371
RUEHMN/AMEMBASSY MONTEVIDEO 2675
RUEHSG/AMEMBASSY SANTIAGO 2371
RUEHLP/AMEMBASSY LA PAZ 3782
RUCPDOC/USDOC WASHDC 3064
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC

UNCLAS SECTION 01 OF 03 SAO PAULO 000214

SIPDIS

SIPDIS
SENSITIVE

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

E.O. 12958: N/A
TAGS: ECON EFIN EINV AR BR
SUBJECT: BRAZILIAN STOCK EXCHANGES GET GREEN LIGHT FOR MERGER


SENSITIVE BUT UNCLASSIFIED--PLEASE TREAT ACCORDINGLY

REF: A. SAO PAULO 0115
B. 07 SAO PAULO 0899

1. (U) SUMMARY: Brazil's two stock exchanges announced their intent
to merge on March 27. The merger of the Brazilian stock exchange
(Bovespa) and the Commodities and Futures Exchange (BM&F) into BM&F
Bovespa, S.A. will make the new exchange the third largest in the
world in terms of market value. The merger should bring down
administrative and transaction costs and allow the combined company
to trade in a broader range of products and to compete more
effectively with global exchanges such as NYSE-Euronext. The merger
should also further consolidate Brazil's position as an important
emerging market economy and strengthen its financial system. Post
has good relations with both BM&F's CEO Manoel Felix Cintra Neto and
Bovespa's Chairman Raymundo Magliano Filho, the two frontrunners to
lead the combined BM&F Bovespa. END SUMMARY.

The Merger
----------

2. (U) On March 27, Brazil's two stock exchanges, Bovespa and the
Commodities and Futures Exchange (BM&F), announced their merger into
what will be called BM&F Bovespa. The announcement follows their
initial statement of merger talks on February 19 (ref A), and came
well before their self-imposed 60 day deadline. Last year, both
companies held initial public offerings (IPO), and their exchanges
had record-breaking years. Bovespa Holding raised USD 3.8 billion
in October (ref B), which was the largest IPO in Brazil's history.
One month later, BM&F raised USD 3.4 billion. The merger will make
the new exchange the third largest in the world in terms of market
value, with an estimated combined value of USD 20 billion, behind
only the Chicago Mercantile Exchange Group/New York Mercantile
Exchange (USD 36 billion) and Germany's Deutsche Borse (USD 32
billion).

3. (SBU) Bovespa's CEO and Director of Investor Relations Gilberto
Mifano told the Consul General that the two companies will retain
their separate brand names under one umbrella holding to be called
BM&F Bovespa. (Note: Earlier press reports suggested the company
would be called Nova Bolsa, or New Exchange in Portuguese. End
Note.) On May 8 the majority shareholders will elect one Chairman,
likely either BM&F's Manuel Felix Cintra Neto or Bovespa's Chairman
of the Board of Directors, Raymundo Magliano Filho. Cintra Neto
told Econoffs that he would return to his banking business if he was
not chosen to lead the combined entity, but opined that should he be
appointed, he would like for Magliano to stay at the company,
particularly in light of his expertise in corporate social
responsibility.

Leveraging Lessons Learned and Existing Partnerships
--------------------------------------------- -------

4. (SBU) BM&F Bovespa, the fourth such merger of exchanges in
recent history, is taking advantage of lessons learned. In October
2007, the Chicago Mercantile Exchange Group (CME) purchased 10
percent of BM&F in exchange for two percent of the CME. Cintra Neto
noted to Econoffs that the CME has provided integral support to BM&F
as it undergoes the merger. Cintra Neto stated that there are
currently 10 to 12 BM&F staffers at CME, and that these ongoing
personnel exchanges will facilitate the merger.

5. (SBU) Cintra Neto also told Econoffs that, unlike the recent
mergers of the New York Stock Exchange (NYSE) with Euronext and the
CME's merger with the New York Mercantile Exchange, BM&F Bovespa
intends to integrate the two companies' administrative functions
where possible, including eliminating one CEO. Cintra Neto
criticized similar mergers for not leveraging synergies to reduce
costs. Cintra Neto further stated to Econoffs that the BM&F Bovespa
union should be a more seamless merger. Unlike NYSE and Euronext,
for example, BM&F and Bovespa have overlapping clients and
shareholders, a common language and business culture, and are
physically located across the street from each other, all of which
should facilitate an earnest integration of the two companies.


SAO PAULO 00000214 002 OF 003


Cost Cutting
------------

6. (SBU) Bovespa and BM&F executives intend to leverage existing
synergies and eliminate administrative duplication. BM&F Bovespa
hopes to integrate the company's electronic trading platforms, as
well as its clearance and settlement activities. The two companies
have an aggressive goal of reducing combined overhead costs by 25
percent within three years. Cintra Neto remarked to Econoffs that
approximately 90 percent of costs are for either IT systems or
payroll. To maximize cost cutting benefits, BM&F Bovespa plans to
slash personnel, especially in administrative and information
technology. Cintra Neto stated that BM&F Bovespa plans to honor
stock option vesting commitments for all employees they dismiss.


7. (U) Bovespa's Mifano told Econoff that he anticipates a
reduction in costs to investors as well. The two exchanges have
significant client overlap and BM&F Bovespa would be able to manage
all transactions under one roof and pass these savings on to
customers. Although Bovespa's transaction and administrative costs
are higher than other exchanges, Mifano noted that Bovespa is a
vertically integrated exchange and its overall costs (about three
percent of total daily trading volume) are on par with peer
exchanges. (Note: Brazil's strict transparency rules require
Brazilian exchanges to manage clearing and settlement functions
in-house. Bovespa's fees include all transactions, clearing, and
settlement costs, while traditional exchanges only levy transactions
fees and brokers' fees tend to include clearing and settlement
costs. End Note.)

Awaiting Approval
-----------------

8. (U) The Boards of Directors of the two companies approved the
merger on April 17 and both executives told Econoffs that the other
approvals are forthcoming. The Central Bank gave its informal
blessing (but still needs to formally approve) to consolidate four
clearance and settlement functions into one entity despite some
misgivings about concentrating those efforts. Similarly, Mifano
told Econoff that the Brazilian Securities and Exchange Commission
(CVM by its Portuguese acronym) also should have no problems with
the merger as it simplifies their supervision of the two exchanges.
Finally, the Brazilian antitrust regulator (CADE) must sign off. As
the two companies were never competitors, they do not anticipate
that their merger would create an anti-monopoly backlash.

BM&F's Vision for Regional Integration
--------------------------------------

9. (SBU) While the merger helps BM&F Bovespa (and by extension
Brazil) better position itself to compete with other modern
exchanges, both exchanges are predominately domestic and BM&F
Bovespa is working to partner with other exchanges to increase its
competitiveness in the global marketplace. Cintra Neto noted that
BM&F has always had a collegial relationship with U.S. exchanges and
BM&F's Director of Investor Relations Joao Lauro Amaral stated that
BM&F's agreement with CME helps link BM&F to the U.S. market. As a
result, the two exchanges have an order routing agreement whereby
BM&F and CME distribute each other's derivatives products on their
respective local markets. Cintra Neto further explained that BM&F
trades its Brazilian soy futures contracts on CME's exchange and is
helping CME establish American soy futures contracts in Brazil as
well. Cintra Neto affirmed that BM&F had been in talks with NYSE's
former CEO John Thain to exchange shares while holding ongoing talks
with CME, but that a merger with Bovespa would have been impossible
if BM&F had opted to cut a deal with the NYSE instead. BM&F does
have agreements with the NYSE, however, as well as with exchanges in
Mexico, China, and Argentina. BM&F is also an active participant in
the Futures Industry Association in Washington and the U.S Commodity
Futures Trading Commission.

10. (SBU) Cintra Neto said that BM&F is not currently interested in
buying exchanges in the region. Instead, he prefers the model it
has with the CME of sharing electronic platforms and resources.
Cintra Neto told Econoffs that BM&F is committed to helping the rest

SAO PAULO 00000214 003 OF 003


of Latin America develop its financial systems via technology
transfers and exchanging business "know-how." Cintra Neto mentioned
that despite the Argentine exchange's recent descent, it continues
to have a strong agricultural commodities exchange in Rosario. He
noted that BM&F is working with the Argentines to develop
Brazil-Argentina soy futures contracts, which BM&F hopes will
attract Chinese investors. (Note: BM&F acts as an intermediary
between buyers and sellers, especially for the Chinese. According
to Cintra Neto, Chinese importers do not trust Latin American
agriculture producers to deliver their merchandise and Brazilian
producers in turn are afraid Chinese importers will not pay. BM&F's
futures derivates facilitate the Brazil/Argentine-Chinese
agriculture trading. End Note.)

COMMENT
-------

11. (SBU) BM&F Bovespa has a healthy approach to managing their
merger, which has clearly been in process since before each
company's IPO last year. Both Cintra Neto and Magliano are capable
and impressive businessmen with whom post has regular contact.
Despite external market turbulence, both Brazilian exchanges have
out-performed other emerging markets and the merger should further
consolidate Brazil's position among emerging market economies and
help strengthen Brazil's already solid financial system. END
COMMENT.

12. (U) This cable has been cleared with Embassy Brasilia and
coordinated with the US Treasury Financial Attache in Sao Paulo.

WHITE

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