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With Capital In Hand, Spain Revisits Its Empire


June 29, 2003
Copyright © 2003 THE NEW YORK TIMES. All rights reserved. 

MADRID - ALFONSO CORTINA DE ALCOCER has been around long enough to experience Latin America's economic turmoil, yet it has not shaken his confidence in the drive by Spanish business to reassert itself economically in a region that Spain lost politically in the 19th century.

Mr. Cortina, 59, chairman of Repsol YPF, the Spanish oil company, well remembers Mexico's economic meltdown in the 1990's. He was in Argentina in 2001, when the uncoupling of the peso from the dollar sent the economy spinning. Yet in the last eight years, Repsol — formed in the 1990's out of scattered energy interests — invested 38.5 billion euros ($44.5 billion at current exchange rates), about two-thirds of it in Latin America.

But he says that if he had to do it over, he would.

"There was good stability in South America, good opportunities and liberalization," he said. "Of course, too, these opportunities were much cheaper than European investments."

Mr. Cortina was not alone. Spanish banks went on an acquisition binge in Latin America. Endesa, Spain's largest utility, made investments in Chile, Argentina and Brazil. The national telecommunications giant, Telefónica, cut a broad swath through the region. So did some of Spain's biggest media companies, like Grupo Prisa. In recent years, roughly 90 percent of Spain's direct foreign investment has flowed into the region.

The results were striking. In Brazil, Mexico and Chile, Spanish banks like Banco Santander Central Hispano emerged as market leaders or the No. 2 banks. Telefónica and its cellphone division, Telefónica Móviles, challenged local rivals. At Repsol, Mr. Cortina merged the company with YPF, Argentina's biggest oil and gas producer, and built a presence from Tierra del Fuego to Baja California.

But the gamble did have a price. When Argentina collapsed, Spanish investors were hit hard. Repsol, Banco Santander and others took big losses.

"The region is going through some tough political and economic moments," said Laura Alfaro, an emerging-markets specialist at the Harvard Business School. "Surviving this will be a big challenge."

Complicating matters, Spain was being tested at home. While the Spanish economy is strong, the European Union is bracing to admit new members from Eastern Europe, where low wages have helped siphon investment that once went to countries like Spain and Portugal. In the auto industry, Peugeot, which has Spanish factories in Madrid and Vigo, will build its next ones in the Czech Republic and Slovakia; Volkswagen, which assembles the Seat Ibiza in Catalonia, will shift 10 percent of production to Slovakia.

Skeptics now worry that Spain invested too heavily in Latin America. Already, the industry ministry and the Spanish national bank have warned against overexposure. Yet supporters say the investments will pay off. "They are really there for the long term," said Claude Giorno, an economist at the Organization for Economic Cooperation and Development.

Francisco Luzon was running the Latin American operations of Banco Santander during the Argentine crisis of 2001. He said his experiences were unlike any he had ever had in Spain.

As Argentina let the peso float, it set different exchange rates for the peso versus the dollar: loans outstanding were valued at one to one; deposits fluctuated with the peso's market value. As a result: Mr. Luzon decided to set aside provisions on Santander's balance sheet for its banking and pension fund activities in Argentina to the tune of 1.3 billion euros. "They broke all the rules of the game," Mr. Luzon said of Argentina's government.

For Santander and Mr. Luzon, the main lesson was the importance of managing risk. Yet it also led them to focus on the bigger markets of Latin America. Now, Santander does 92 percent of its business there in Brazil, Mexico, Chile, Venezuela and Puerto Rico.

One advantage of being in Latin America is its pivotal role as the back door to the United States. In 2000, for instance, Mr. Luzon paid $1.56 billion to acquire Mexico's third-largest bank, Grupo Financiero Serfin. Last year, Mr. Luzon more than recouped his investment by selling 25 percent of the bank to Bank of America for $1.6 billion.

Bank of America paid so dearly because it was seeking to compete with Citigroup for fees on the estimated $10 billion that Mexicans in the United States send to their families each year.

Others are also seeking to exploit the proximity to the United States. Repsol is in a project to supply energy to California. Telefónica is focusing its mobile phone activities on Brazil and Mexico; one attraction, Telefónica executives acknowledge, is the lucrative roaming fees that Mexicans pay when they travel to the United States and call home.

Plural Entertainment, a unit of Grupo Prisa, Spain's largest media group and an investor in Latin America, in February signed two deals with companies in Florida to enter the market for Hispanic entertainment. In a film deal, Prisa and Televisa Cine of Mexico, a big producer of Spanish-language films, joined with the Latin World Entertainment Agency of Miami to make and distribute movies in Hispanic markets, including the United States.

For now, Spanish investment in Latin America has stalled. In the first half of 2002, new Spanish investment there fell to 2.6 billion euros, from 26.6 billion euros in all of 2001 and 29.1 billion in 2000.

Yet for all the trouble, Latin America has brought some benefits for companies like Repsol and Telefónica. "Latin America is one point where Spain has clear advantages," Mr. Luzon said by phone from Mexico, where he scours for business. "Either Spain takes advantage of its strengths there, or Spain is no longer going to have 3 or 4 percent growth rates."

Spanish executives reject the suggestion that they are latter-day conquistadors.

"Completely absurd," Mr. Cortina of Repsol said. "Of course, we are proud of Spain," he said, yet he added that Spanish companies entered Latin America "first of all, to do business, but also to help and support these communities."

Some people in Latin America are not so sure. In Argentina, big Spanish banks and businesses were principal targets of local anger after the crash. In Chile, after Santander began a hostile bank takeover in 1999, bad blood surged among local business leaders.

Pedro Videla, a Chilean economist at the Barcelona campus of the IESE Business School, said Latin Americans often resent Europeans' running their biggest companies. "The Spanish thought they had an advantage," he said. Miami, he added, with its sizable Hispanic population, "is the real capital of Latin America."

Ana Patricia Botín was there at the creation. The daughter of Emilio Botín, Santander's ebullient chairman, Ms. Botin began Santander's push into Latin America in the 1990's. Now chief executive of Santander's domestic affiliate, Banesto, she attributes Santander's success to its original plan.

First, she said, "you needed to have significant market share, and two, you had to be in the large countries." Another element, she said, was the appointment of local managers with a broad vision.

"That doesn't mean we did well in every single place," Ms. Botin said. "But over all, Latin America has been a very, very good investment for us."

She disputes the notion that Spain has exhausted itself in Latin America, leaving little for other regions. In Eastern Europe, for instance, where others see challenges, she sees chances.

On a recent visit to Grupo Antolín, a successful Spanish auto parts maker, she found that Antolín had opened its first factory in Eastern Europe eight years ago.

"I met owners of 10 Spanish companies last week," she added. "All had factories in China. It's the only way they can compete." 

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