Votorantim: Odd Moves & Motives

Highlighted in this post are the following companies: CPFL Energia (CPL - Analyst Report), Votorantim Celulose (VCP - Analyst Report), Aracruz (ARA - Analyst Report) and VBC (VBC).

Grupo Votorantim has a long tradition in Brazil and is one of the biggest private groups in Latin America. Some days ago, Votorantim decided to sell its controlling stake in CPFL Energia (CPL - Analyst Report) to Camargo Correa Group. In fact, Camargo Correa already participates in the control of CPL, thus we do not expect any changes in the short-term.

The outlook for medium term remains quite encouraging, even though short-term results will be affected by the economic crisis. However, this is just a part of some strange developments that have been going on within the Votorantim Group.

In January 2009 Votorantim announced that it was selling 49% of its bank, Banco Votorantim to Banco do Brasil, a state owned Brazilian bank, by BRL4.95 million (US$2.15 billion). It sounds strange that a huge bank like Banco do Brasil could be interested to acquire a minority stake in a much smaller investment bank; also strange was the price paid, which sounds excessive.

Also in January, Votorantim Celulose or VCP (VCP - Analyst Report) announced the acquisition of 28% of the capital of Aracruz (ARA - Analyst Report). With the stake of 28% that VCP already had, now VCP has full control of Aracruz. The companies together now form the biggest pulp and paper company in the world.

The deal was possible because the Brazilian National Development Bank (BNDES) will participate in the joint venture with an amount of US$1 billion. The deal makes sense, mainly considering the huge losses in currency derivatives Aracruz faced some months ago.

What is hard to explain is the price paid. VCP paid over BRL18.00 (USD7.8) per ordinary share of Aracruz, when the highest price this stock ever reached was BRL17.25 in June 2008.

In fact, Votorantim group also had many losses in derivative instruments some months ago. Since then it has been difficult to understand the moves within the Group; even more difficult is to understand the relationship of the group and the Government and some Government controlled companies.

It sounds like a disguised bail out, not only for Votorantim, but for Aracruz too. We prefer to avoid companies related to Votorantim Group, thus we still have a Sell recommendation of VBC (VBC) and Aracruz.

After the CPFE deal, we feel even more comfortable to keep on recommending a Buy on CPL.

Read the full analyst report on CPL

Read the full analyst report on VCP

Read the full analyst report on ARA

Read the full analyst report on VBC