LIMA, Peru -- The government of Peru is selling the last of its stakes in state-owned companies to bolster senior citizens' retirement assets and to aid the local mutual fund industry.
On March 31, three teams of international investment firms and local money managers were selected to sell leftover government holdings in privatized Peruvian companies; proceeds from the $800 million of public offerings will be used to launch specialized public-savings funds.
The international components of the winning consortia included Merrill Lynch, Salomon Smith Barney, and Flemings Latin Pacific Peru.
The government -- through its Special Privatization Committee of Citizen Participation, known locally as the Cepri -- aims to use the consortia to offer the holdings in national and international markets. The Cepri selected winners based 85% on the technical aspects of the proposals and 15% on the economic aspects.
The government received proposals from other consortia whose international components included Dresdner Kleinwort Benson, J.P. Morgan and SBC Warburg.
Although the government has sold off most of its stakes in former state-run entities, such as utility Emprese Distribucion Electrica Lima Norte SA, or Edelnor, and oil concern Refineria La Pampilla, or Relapasa, it still holds minority positions in these companies, which it now seeks to liquidate. The sale is aimed at helping retirees and boosting the growth of local mutual fund companies, which have teamed up with the international managers.
According to the government plan, $500 million of the proceeds of the sales will finance the creation of Fondos Mutuos de Ahorro Publico, whose clients will include 600,000 seniors who reached retirement age before the start of the country's new private pension system. The remaining $300 million will go to the national treasury.
The original plan proposed by the government of President Alberto Fujimori was to sell the holdings through specialized mutual funds directly to retirees at a 30% discount, in lots of $1,000 or $2,000. The retirees were to be asked to pay the 70% balance in semiannual installments after first making a nominal down-payment of between $17 and $35. It was hoped dividend payments of the issues would cover the semiannual installments, meaning a zero net outflow for already strapped retirees.
This plan was scrapped for three primary reasons:
* The view of local money managers that equities, traditionally touted as classic long-term instruments, were not the best type of investment for retirees with current-income needs;
* The fear the retirees would immediately attempt to sell off their positions, leading to a spike in consumption levels and inflation;
* The impact of the Asian crisis in late October, which provoked worries about the vulnerability of the securities' future worth in the age of a global economy.
The Cepri packaged the various securities into four groups, and has ruled that each consortium may control only one group. The first group, for example, is composed of the stock of Edegel SA, Edelnor, Cahua, Empresa Electrica de Piura and Etevensa. The second and third groupings consist of the stock of Edelnor and Banco Continental, respectively, while the fourth is made up entirely of shares of Relapasa.
Peru's largest bank, Banco de Credito del Peru, decided to ally itself with Merrill Lynch, and the consortium was awarded the first group. The consortium already has indicated it would offer the Edegel shares (worth roughly $400 million) through public offering and look to sell the remaining issues in the group to mutual funds with an energy focus.
The second package, also hotly fought for, went to the consortium of Interinvest and Salomon Smith Barney. Merrill Lynch-Banco de Credito was again awarded the selling rights to this group but resigned after already having been appointed to the first group. Peru's Banco Wiese and J.P. Morgan, the local division of Santander Investment and Dresdner Kleinwort Benson, and Prisma Inversiones and SBC Warburg, were unsuccessful in their bids for the package.
Banco Continental and Flemings Latin Pacific Peru were awarded the third package, while the fourth was declared void, given that the only participants for the package already had been chosen for the other groups.
Three international entities -- Deutsche Bank, Citibank and ING Barings -- did not enter the bidding despite showing interest in participating early on in the process, begun in late 1997. Rules required each consortium include both an international and a local firm.
Despite being selected, the winning participants still will have to endure what promises to be a drawn-out affair: the Cepri has indicated that, once chosen, the consortia will have to participate actively in the structuring and execution of the deals based on as-yet unspecified objectives and directives of the Cepri and another government agency, the Commission for the Promotion of Private Investment.
For its part, the Merrill-Banco de Credito consortium has indicated it would try to offer the shares of group one companies during the last quarter of 1998.
Peru's mutual fund industry is small but growing, with $618 million in assets at the end of 1997, spread out among 13 funds. The funds began the year with just $127 million in assets. Representatives of local fund managers all see the growth continuing based on the creation of the new class of funds as well as recent legal changes that now permit diversification outside Peru.