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Merger Mania

Despite Post-Recession Blues, Local Mergers & Acquisitions Worth $1.6 Billion Last Year Indicate Local And Outside Investors Remain Gung-Ho On Puerto Rico’s Economy


August 21, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Tit for tat: Global powerhouses gobble up some local market leaders, but local entrepreneurs with chutzpah also buy out the Puerto Rico operations of major worldwide companies.

Talk is cheap. Nothing shows investor confidence better than money on the table. In 2002, Puerto Rico’s largest mergers, acquisitions, and management buyouts totaled $1.6 billion. In the context of a beleaguered global economy, those transactions were a considerable vote of confidence in the local economy’s potential for profit and growth.

The caliber of the companies involved merits a deeper look at the implications of the recent mergers & acquisition (M&A) activity for the Puerto Rico economy. Such global big leaguers as Wal-Mart, Marsh McLennan Companies, Cemex, and Univision are betting on Puerto Rico’s economy, a good sign of things to come, say experts in the field. Recent M&A activity has also managed to save jobs, rescue local operations from bankruptcy, and put important businesses in the hands of local entrepreneurs.

During the ’90s, of course, Puerto Rico saw bigger numbers. The M&A market was booming a decade ago, but the global economic slowdown has taken its toll on such transactions.

Carlos Souffront, partner in the corporate department at legal firm McConnell Valdes, said M&A activity has slowed down considerably over the past two years. "The M&A market moves in cycles, and I think we’re now paying the price for the excesses of the ’90s boom market," said Pedro Gonzalez, senior vice president of Invesco.

"Over the past few years, we have seen an average of some 10 M&A transactions valued at more than $20 million," said Michael McDonald, senior vice president of Banco Popular de Puerto Rico’s corporate finance & advisory services division. "Some years we have five, some years we may have seven, but we have seen no major shift in that trend."

He added that the M&A market could have slowed because banks have become less aggressive about financing big-ticket transactions during an economic turndown. Real-estate transactions, however, have become more attractive precisely because of the tightened economy.

"When the economy slows down, interest rates go down, rendering such investments as stocks and bonds highly unattractive," said McDonald. "Real estate becomes the most attractive investment."

Souffront said the motivations for selling local companies to foreign or U.S. mainland investors vary, but certain trends do prevail in Puerto Rico. For example, many family-owned businesses that flourished after World War II have recently been sold because there were no clear successors to continue growing them. As a result, the owners opted to cash out.

It is also common for local business owners to look outside Puerto Rico to sustain operations that require large capital investments to compete effectively. Third, said Souffront, in an effort to survive in Puerto Rico’s finite market, some businesses choose to consolidate and reach economies of scale through mergers or acquisitions.

Big fish buys little fish

Kenneth McGrath, president of Popular Securities, said buyers who come knocking on local doors look for market leaders that are well-run, with sharp management and keen local expertise. Many of the transactions compiled in the CARIBBEAN BUSINESS list of Puerto Rico’s Major Mergers & Acquisitions in 2002 prove such matches have been successful.

The most significant M&A transactions of last year represent strategic moves by leading global players to offensively or defensively grab a stake of the local market. According to Gonzalez, Puerto Rico is an important link in the regional or global expansion plans of such companies as Univision, which is set to acquire TeleOnce’s local TV stations; Marsh Inc., which recently acquired leading insurance brokerage Saldaña & Associates; and Cemex SA, which acquired Puerto Rican Cement, a company that held 50% of the island’s cement market.

Univision, the largest Hispanic media company in the U.S., realized Puerto Rico’s four million Spanish-speaking inhabitants were potentially a captive market for its programming and a ripe opportunity to increase revenue through advertising. Aside from the chance to rake in ad dollars, Univision saw an opportunity to tap into the local talent pool and export locally produced programming to the U.S. mainland.

The official closing of the deal isn’t expected until later this year, but it seems Univision is here to stay. The company is currently fulfilling a management contract with Raycom Media, owner of TeleOnce’s TV stations, and has managed to solidify ratings and begin airing local programming stateside. McGrath said the Univision / TeleOnce merger is one of the deals with the greatest potential to have a positive impact on Puerto Rico’s economy.

Regarding the acquisition of Saldaña & Associates by Marsh Inc., a leading global insurance company, economist Vicente Feliciano, managing partner of Advantage Business Consulting, says it was a defensive move to protect Marsh’s position in the local market. Saldaña had long been Marsh’s correspondent on the island, but with banks aggressively entering the insurance market, Marsh thought it prudent to secure its stake in Puerto Rico.

Eduardo Emanuelli, executive vice president & managing director of the newly named Marsh Saldaña, said his team’s knowledge of the local insurance arena adds value to Marsh’s business. "They [Marsh] analyzed our operation and saw what great potential it has. They did their due diligence, studying our professional standards and financial operations, and we qualified on all fronts," he said.

Emanuelli added that the local economy will benefit from the creation of more jobs and the expansion in such areas as health, financial services, and property insurance, which will be backed by access to the resources of one of the largest insurance brokers in the world. The total value of the transaction hasn’t been disclosed, but a source estimated it at $20 million to $40 million.

The acquisition of Puerto Rican Cement by Mexican company Cemex SA, however, hasn’t inspired unanimous optimism from local experts. On the one hand, McGrath said Puerto Rican Cement received a competitive price for its operation and subsidiaries, and the transaction allows Puerto Rican Cement to maximize its potential. "The acquisition gave it the ability to go outside Puerto Rico and possibly export product, because although it has good facilities, the local market has been constrained by how little construction has been going on," he said.

Feliciano, on the other hand, said that while international investments in Puerto Rico are usually good news, the acquisition shouldn’t prompt a major change of course in the company’s direction. What’s more, the potential to export product after the acquisition will probably be limited.

In 2002, Puerto Rico’s maritime industry was marked by the disappearance of one of its oldest ocean-carrier lines and the acquisition of one of its most successful shipping companies. The assets of Holt Group Navieras were sold to Sea Star Lines for $32 million.

The purchase eliminated one competitor from what is considered an overtonnaged market and gave Sea Star an opportunity to increase its market base. The carrier also got four vessels, all of Navieras’ machinery, and four gantry cranes. Sea Star now owns the lease on Navieras’ former Ports Authority terminal and the assets of San Juan International Terminal Inc.

Late last year, CSX Corp. announced the sale of its domestic shipping arm, CSX Lines, to Washington-based The Carlyle Group, a global private equity firm with more than $14 billion under management. CSX Lines was sold for $300 million in cash and securities, although the transaction didn’t affect the Puerto Rico operations, led by Vice President & General Manager Gabriel Serra.

Local entrepreneurial spirit

A group of local entrepreneurs were the protagonists of some important M&A or management buyouts last year. Among them were Edmundo Rodriguez, who acquired customs brokerage firm Nestor Reyes; Enrique Mangual, who saved Productos Kikuet from disappearing under General Mill’s management; and Alfonso Fernandez, who kept the local logistics operation of Swissport from folding.

Many of these transactions represented significant investments in the local economy and saved jobs in this tough labor market. They also demonstrated the entrepreneurial capabilities of local businesspeople, according to Feliciano.

"Many of these companies were victims of outside owners’ inability to leverage their [the companies’] potential," he said. "Taking them over is a riskier route for local entrepreneurs, but it is also more rewarding for them and for the local economy."

Ivyport’s acquisition of Swissport Puerto Rico is another success story. According to Fernandez, situations outside Puerto Rico compelled Swissport to divest itself of the local operation. An investment banker, Fernandez said his drive to protect employees and clients and his hands-on management style enabled him to maintain a sophisticated operation and build on it, retaining local expertise and ownership and saving more than 100 jobs.

Invesco’s Gonzalez pointed out a number of cases where local companies made piecemeal acquisitions of other local or outside companies. Gonzalez believes theses moves reflect the harsh economic reality of past few years. First Bank’s acquisition of the assets of JPMorgan Chase in the U.S. Virgin Islands and Mendez & Co.’s acquisition of the distribution rights & facilities of Carlos Malave, for example, show companies are much more selective about where to invest.

"Companies are trying to optimize their capital investments, so they are obviously going to be more selective and look to acquire whatever promises the greatest value for them," said Gonzalez.

What does it all mean?

M&A activity in Puerto Rico last year was more than business as usual. "These transactions were a vote of confidence in these particular industries within our economy," said McGrath. "These industries are obviously an important part of Puerto Rico’s economy, which is why market leaders have drawn the attention of investors."

"Market leaders can be attractive," said Gonzalez. "Now more than ever, acquiring a company is a scientific process. Sellers have to prove how they will fit into the bidders’ global structure, and many of these buyers are companies with a global presence."

Feliciano said acquisitions are welcome news for the local economy because they bring new capital, new technology, and better training for the local work force.

"Liquidity is the secret of it all," said Hector del Rio, an independent financial consultant. "Outside investments bring in the liquidity that the local market lacks. They also help Puerto Rico stay on the radar of other investors out there."

Gonzalez added such investments demonstrate Puerto Rico has financially solid companies with high levels of expertise. "Transactions such as Cemex buying Puerto Rican Cement insert Puerto Rico into global integrated-production processes or within the context of a broader strategy," he said. "They incorporate the island into globalization. While some people may not agree, globalization is unstoppable, so we might as well jump on the bandwagon."

In addition, said Gonzalez, when nonlocal companies set up shop on the island, they expose the local work force to different management methods, enhancing their knowledge and skills. Local workers also get opportunities to develop their careers outside Puerto Rico, he said.

Experts in the field are looking forward to the next wave of M&A activity. McConnell Valdes’ Souffront said there are already signs of a resurging market, as the firm’s corporate division has begun working on deals that could happen early next year.

H-P and Pfizer’s $85 billion acquisitions create manufacturing giants in P.R.

Two of the largest mergers in the global manufacturing industry last year had a tremendous impact on Puerto Rico: Hewlett-Packard Inc.’s (HP) $25 billion purchase of Compaq Computer Corp. and Pfizer Inc.’s $60 billion acquisition of Pharmacia Corp.


HP and Compaq come together

In 2001, HP CEO Carly Fiorina announced the company’s intention to buy Compaq, creating a high-technology behemoth with combined sales of $87 billion and earnings of $4 billion. With a combined local work force of 1,800 HP and Compaq employees, Puerto Rico has become HP’s center of technology development and is in a strategic position to provide products and service to the Caribbean and Latin America. HP currently dominates in the areas of servers, personal computers, handheld computers, and imaging and printing solutions.

HP’s 68-acre manufacturing complex in Aguadilla produces 40% of the HP inkjet cartridges sold worldwide. In 2001, a $100 million public/private investment added a research & development center and more production-line area at the complex. The Puerto Rico Industrial Development Co. (Pridco) is building a $20 million industrial park in Aguadilla to house additional HP contract-manufacturing operations.

Three of HP’s contract manufacturers currently operate from an 87,000-square-foot industrial park built in 2002 on a Pridco lot next to HP. Contract manufacturers Nypro, Manufacturer Services Ltd., and Arrow Electronics supply HP with product parts. Other suppliers nearby run contract manufacturing and service operations for HP, among them Sensormatic, Smart Modular / Solectron, Caribe GE, PCB Horizon, Western Manufacturing, TechnoPlastics Industries, and P.R. Storage.

Puerto Rico’s importance to HP’s worldwide operations is evident by the recent announcement that Fiorina could be visiting the island in October to make announcements related to the local operation.

King of the pharmaceutical industry

Pfizer’s acquisition of Pharmacia has created the largest pharmaceutical drug-manufacturing operation in the world. With six of the two companies’ production facilities, Puerto Rico manufactures more than a dozen of their key products.

After finalizing the deal in June, Pfizer now boast $48 billion in annual revenue, including nearly $40 billion in prescription sales. In 2002, the six local plants produced 13 of the best-selling pharmaceutical drugs, including Lipitor, Norvasc, Celebrex, Zoloft, Neurontin, and Viagra.

CARIBBEAN BUSINESS recently interviewed J. Patrick Kelly, Pfizer Inc. vice president & Pfizer U.S. Pharmaceuticals Group president (CB Aug. 14). He said Pfizer’s new-products’ pipeline is the lifeblood of the business and Puerto Rico’s manufacturing of its products is the lifeblood of Pfizer. He isn’t exaggerating.

For the second-quarter 2003 (ended June 20), sales of products manufactured in Puerto Rico by Pfizer or Pharmacia reached $6.8 billion, or 68% of the nearly $10 billion in total sales worldwide (CB Aug. 7). That $6.8 billion is 20% of the $34.3 billion produced and sold by only five pharmaceutical manufacturing companies in Puerto Rico. The key-products list contains 16 drugs, including Lipitor, the world’s best-selling drug.

What will happen to the 6,400 employees now working for Pfizer at the six Puerto Rico plants? Time will tell. Kelly said the manufacturing potential of each plant is being studied as we speak, just as the company’s hugely expanded product line is being analyzed.

The company appears to be operating at full speed, delivering its products to sales & marketing divisions all over the world. With approximately 10 new products in the pipeline for 2003, and a good possibility that these will be produced on the island, Pfizer has definitely become a major player in Puerto Rico’s economy.

Nearly $300 million in hotel acquisitions in P.R. over past two years


In the past couple of years, Puerto Rico’s hotel industry has seen five major acquisitions with a combined value of nearly $300 million. Some deals have been finalized while others are expected to close by year’s end.

The largest of the five transactions came in December 2002, when the government selected International Hospitality Enterprises (IHE), headed by veteran hotelier Hugh Andrews, to be the developer of the former Condado Trio. IHE’s $183.3 million proposal required the government to play a smaller role in financing the project. It called for the government to issue $44 million in Afica bonds via the Tourism Development Fund, to grant IHE $8.8 million in tax credits, and give IHE a 99-year lease on the land for an annual fee of 3.5% of the net sale of the proposed rooms or $1 million, whichever is greater. The deal has yet to be finalized.

The second-largest transaction came in September 2002, when RECP San Juan Investors LLC, a subsidiary of Donaldson, Lufkin & Jennette Real Estate Capital Partners (a wholly owned indirect subsidiary of Credit Suisse First Boston), bought the $85 million Afica bond debt for the Ritz-Carlton San Juan Hotel, Spa & Casino from the Government Development Bank. RECP is said to have paid no more than $48 million for the government’s debt.

The third-largest deal occurred in August 2002, when HR Properties President Eduardo "Tati" Ferrer and IHE President Hugh Andrews partnered to refurbish and operate the former Holiday Inn Crowne Plaza in Isla Verde as the Courtyard by Marriott Isla Verde Beach Resort. Scotiabank provided a $27.8 million loan, guaranteed by the Tourism Development Fund, for the property’s renovation.

The fourth-largest transaction, scheduled to close this month, is the $16 million purchase of the Carib-Inn by veteran hotelier Rick Newman, president of Flagship Services. Scotiabank is expected to finance the project.

The fifth deal is the sale of the former Candelero Hotel at Palmas del Mar. Empresas Santana is expected to finalize the $6.1 million purchase with Banco Santander this month.

Industry experts say the pace of hotel sales in Puerto Rico has slowed with the successful workout of most distressed debt, but changes in ownership patterns driven by acquisitions are creating a new industry profile. On the buyer side, local investors are dominating the market, although there are still foreign players seeking acquisition opportunities on the island. On the seller side, commercial banks and insurance companies have accounted for most of the properties on the market.

Current acquisition strategies reflect diverse missions by investor category. Capital groups have generally focused on acquiring underperforming properties in otherwise strong and improving markets. They look for returns on equity of at least 20% and have defined a shorter-term investment horizon of five to seven years, with clearly defined exit strategies.

This Caribbean Business article appears courtesy of Casiano Communications.
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