A group of Brazilian pension funds, led by the country's largest fund, won a stake in newly sold Companhai Vale do Rio Doce, Brazil's biggest privatization ever.
The move gives pension fund participants significant administrative control of CVRD, the world's largest iron ore producer and exporter. The deal also continues the wave of corporate governance activities by some of Brazil's large pension funds that started when privatizations began in 1991.
The Brazilian government May 6 sold a 41.73% controlling voting-share stake in CVRD to Consorcio Brasil for $3.1 billion. Consorcio Brasil, comprised of numerous institutional investors, was led by Companhai Siderurgica Nacional, Volta Redonda, Brazil's largest steelmaker. Among the institutional investors were four pension funds of state-owned companies, headed the $20 billion Caixa de Previdencia dos Funcionarios do Banco do Brasil (Previ), Rio de Janeiro, the country's largest pension fund. The four funds bought a 10.43% stake in CVRD for $787 million.
CSN had wooed the Previ-led pension fund bloc by promising it a strong administrative role in CVRD, and the promise is being kept. Pension funds in the Consorcio Brasil collectively won four board seats for the new CVRD - three going to Previ alone - and CSN obtained three seats. Together, CSN and the pension funds gained seven of the nine CVRD directorships.
A Previ's press spokesman said that "Previ opted to join the Consorcio Brasil because it offered the best conditions, among them numerous seats on the administrative board."
To win its bid, Consorcia Brasil needed the pension funds' investment. A rival bidder, Consorcio Valecom, led by Votorantim Group, Sao Paulo, Brazil's largest industrial group, was mainly attracted to the pension funds for their existing holdings of CVRD voting shares. Previ alone had an 8% stake before the auction; collectively, the other three funds held less than 2% voting share stake. the Votorantim-led group offered the pension funds little, if any, say in running CVRD.
Even though the Consorcio Valecom was a better capitalized and had more product synergies with CVRD, Previ and three funds - the Fundacao Petrobras de Securidade Social of the state oil monopoly Petrobras, the Fundacao dos Economiarios Federais of the federal savings bank and the Fundacao CESP of Sao Paulo state's Companhia Energetica de Sao Paulo regional power company - chose Consorcio Brasil because it offered them considerable administrative powers.
"There's no question that the Previ-led pension fund bloc joined the Consorcio Brasil because it agreed to share control of CVRD with them," said Mirella Rappaport, mining and steel sector analyst with ING Barings, Sao Paulo. "All Votorantim had to offer the pension fund bloc was a silent participation in control of CVRD, something that didn't interest Previ-led pension fund consortiums used to playing a larger administrative role in the companies it buys."
Isabella Saboya, mining and steel sector analyst with Banco Icatu, a Rio de Janeiro investment bank, agreed. "When CSN told the pension funds it was committed to a shared management approach, it was music to their ears, as opposed to the centralized management approach being preached by Votorantim."
Two state-owned company pension funds - the Fundacao Sistel de Seguridade Social (Sistel) of the Telebras telecommunications monopoly and Fundacao Banco Central de Previdencia Privada (Centrus) of the Central Bank - decided to break ranks with the Previ-led consortium and join the Consorcio Valecom.
Up until the CVRD sale, Brazilian pension funds taking part in privatizations always joined forces, never moving to rival bidding groups. In the CVRD sale, the pension funds broke rank and joined rival consortia for reasons other than just the issues of shared/centralized control and additional capital participation.
"In the CVRD sale, the government encouraged the pension funds to split up, some joining one consortium, some joining the other," said another mining and steel-sector analyst for a Sao Paulo investment bank who declined to be named. "In that way, the government couldn't be accused of impartially favoring one consortium over the other."
And Rodrigo Marques, mining and steel sector analyst for the Rio de Janeiro-based Bonazo, Simonsen investment bank, gave yet another reason for the government to encourage such a pension fund split.
"Because CSN was having trouble attracting partners to the Consorcio Brasil, the government was worried that only one consortium, the Consorcio Valecom, would be formed to bid for CVRD, which would mean that CVRD would be sold for the government-set minimum price," said Marques. "To help ensure a higher sales price, the government encouraged some pension funds to join the Consorcio Brasil and thus strengthen the chances of a second bidder, which would force up the CVRD sales' price."
The Consorcio Brasil bought control of CVRD at a price 20% above the minimum price, $30 per share.