Chilean Outflow Investments Poured into Brazil’s Giant Cup

on Oct 4, 2012
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Brazil’s vibrant economy has given its neighbours significant opportunities to invest and expand on its territory. According to the Financial Times, Brazil’s “fertile ground” for businesses has provoked Chile to rank as one of the biggest sources of outwards investment in the region. Data from last year shows that Chilean companies have made a total of $12 billion (£7.5 billion) direct investments abroad, more than any other country in Latin America and the Caribbean.

Chilean companies, having reached maximum saturation in the domestic markets, turned to Brazil for new prospects. The family-owned housebuilder Paz has been selling small and cheap apartments for decades on Chilean turf and since 2010 has expanded into the Brazilian property market. According to Mario Navarro, Paz’s local head, the construction company has done well for itself. “We have something that didn’t exist in Brazil. The smallest apartments in Brazil were at least 45 square metres, and we offered 32sq m.” said Mr Navarro as quoted by the FT.

!m[](/uploads/story/516/thumbs/pic2_inline.png)Cencosud (NYSE:CNCO), the largest Chilean retail company and the third largest retail company in Latin America, has heavily invested in Brazilian stores with its reach now spanning from the north-east all the way to Rio de Janeiro. The company made its initial public offering on the New York Stock Exchange on 22 June and managed to raise some $1.3 billion (£807 million), which could potentially be used to buy more small chains in Brazil and dig deeper into the vast market of 190 million consumers.

Tam and Lan, Brazil and Chile’s biggest airlines, merged in June this year and created the world’s second-largest carrier in terms of market capitalization. It was far from an easy task as it took almost two years to win approval from the antitrust authorities in both countries. The new Latam Airlines Group (NYSE:LFL) can now be seriously competitive on international level, especially when it comes to flights to the US’s eastern seaboard and Asia.

Doing business with Brazil can sometimes get very complicated due to unpredictable regulations and its fluctuating currency. After six painful years of continued effort to develop its business in Brazil, Chilean pharmacy chain Farmacias Ahumada abandoned the venture and pulled out of the country.
Another issue is the unpredictability of some Brazilian companies and their detachment from shareholders. As reported by the FT, GoL, Brazil’s second biggest airline, said on Monday 1 October it is going to make an “important announcement” later in the day. With its half-year net loss of $354 million (£220 million), a series of job cuts and route reductions, investors were doubtless filled with joy that the company would most probably finally be sold. The stocks of the carrier jumped 11 percent pushed by investors’ sentiment of expectation for attractive premiums to be offered in the upcoming deal. Later on Monday GoL announced it is buying 60 Boeing 737 MAX, which will be delivered as of 2018 and not a word was said about selling the company. Shareholders were left with jaws hanging and stocks plunged by more than 10 percent. The mix-up is an explicit example of how strongly some investors feel about the weak state of not only GoL but the Brazilian airline sector as a whole and how faulty is the relationship between management and shareholders in some Brazilian companies.

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