Fund managers cry foul about Brazil pulp takeover

Tue Aug 26, 2008 6:43pm EDT
By Elzio Barreto
SAO PAULO, Aug 26 (Reuters) - A group of money managers and pension funds led by Britain's F&C Asset Management Plc (FCAM.L: Quote, Profile, Research, Stock Buzz) called on Tuesday for stricter takeover rules in Brazil to protect minority shareholders.
The proposed takeover of pulp producer Aracruz Celulose SA (ARCZ6.SA: Quote, Profile, Research, Stock Buzz)(ARA.N: Quote, Profile, Research, Stock Buzz) by rival Votorantim Celulose e Papel may reduce the appeal of Brazil's capital markets by highlighting the vulnerability of some minority shareholders, the group said in a letter to Brazil's securities regulator.
F&C Asset, together with TIAA-CREF, Legg-Mason Inc (LM.N: Quote, Profile, Research, Stock Buzz) and pension funds such as the California State Teachers' Retirement System, said Brazil's securities regulator should act promptly to prevent damages to Aracruz shareholders.
"We are worried about the potential effect this could have in the Brazilian market as a whole since it does affect investors' perception as to how minority shareholders will be treated," said Urban Larson, Latin America portfolio manager at F&C Asset, which has about $206 billion in assets.
Votorantim Celulose (VCP) (VCPA4.SA: Quote, Profile, Research, Stock Buzz)(VCP.N: Quote, Profile, Research, Stock Buzz) agreed on Aug. 6 to double its stake in Aracruz to 56 percent of its voting shares for about $1.7 billion as part of a plan to merge the two companies.
Brazil's Capital Markets Investors Association, a group representing 40 fund managers with some 270 billion reais ($165.4 billion) in assets, said it also filed a petition with Brazil's securities regulator to review closely the Aracruz takeover.
The association, known as AMEC, hopes VCP will revise its takeover proposal to better protect minority shareholders, its president, Luiz Fernando Figueiredo, said.
"If you look at the past years, Brazil's market has evolved a lot in terms of corporate governance, but there is still a long way to go on these matters," said Figueiredo, a former central bank director of monetary policy.
At issue is Brazil's system of dual stock classes, which gives "tag-along" rights to holders of voting shares during takeovers, which preferred shareholders don't receive.
Minority shareholders do not always receive tag-along rights that would give them the chance to sell their stakes at similar conditions offered to controlling shareholders.
Most Brazilian companies still have the two classes of stocks, though companies going public in recent years have only sold voting shares in the Sao Paulo stock exchange's Novo Mercado (New Market), which has stricter corporate governance rules.
Aracruz preferred shares have tumbled 14.5 percent since the takeover was announced, while its voting shares (ARCZ3.SA: Quote, Profile, Research, Stock Buzz) sank 24 percent. VCP's stock is down 7.4 percent in the same period.
VCP said it has no plans to change its offer to appease minority shareholders because it followed Brazilian securities laws.
"We can understand their frustration because everyone wants to get more money," said Luiz Leonardo Cantidiano, a lawyer representing VCP and a former president of Brazil's securities regulator CVM.
"Brazilian regulations are good because they are clear. If investors want more rights, they should look for a market that guarantees that," he said.
"If they want to stay in the old model, they will pay less and have fewer rights." (Editing by Jeffrey Benkoe)