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Spain's second-largest bank, Banco Bilbao Vizcaya Argentaria (BBVA), has been expanding rapidly throughout Latin America, snapping up financial institutions in 10 countries over the past few years. But it badly wanted a foothold in Mexico, the region's second-largest economy and a member of the North American Free Trade Agreement. In March, it got its wish, investing $1.2 billion in Mexico's second-largest bank, Bancomer, for a 30% share and operating control. Bancomer needed outside investment to boost its capital base. Then came a surprise: Mexico's leading bank, Grupo Financiero Banamex-Accival (Banacci) on May 3 made an unsolicited, $2.4 billion counteroffer for Bancomer.
There was some concern in Mexico that a Banamex-Bancomer merger would create a behemoth, controlling most of the mortgages and credit-card operations in the country. Bancomer spent several weeks analyzing the offers, and on June 12, the board of directors decided to go with BBVA -- which had sweetened its offer considerably, to $2.5 billion.
The new bank, to be called BBVA-Bancomer, will control 28% of Mexico's banking assets and have about 2,000 branches. With the acquisition, BBVA will have 7.5% of Latin America's banking assets and a third of its pension funds. Business Week Mexico City Bureau Chief Geri Smith recently spoke with Bancomer Chairman Ricardo Guajardo and BBVA Vice-Chairman and Chief Executive Officer Pedro L. Uriarte about the deal. Here are edited excerpts from their conversation:
Q: Mr. Guajardo, it appears that Banamex did you a great favor by offering a counterbid. You got a much sweeter deal from BBVA as a result.
Guajardo: Well, this is all part of a process that began at the beginning of March. There were certain elements of the financial structure that we designed together with BBVA that created uncertainty in the market. Looking back, it was a very complicated [deal structure] that we designed to improve the value of Bancomer shares. But if the market doesn't like it, then it's not worth doing.
And really, looking back on it, it was a complicated structure, what with the warrants and the convertible obligations that created uncertainty about the possible dilution [of shareholder holdings]. We had planned to close the operation and then deal with the possible problems later, but the Banamex offer meant that we ended up dealing with [the problems] immediately.
Q: Mr. Uriarte, just a few days ago, BBVA insisted that it wasn't going to improve upon its initial offer for Bancomer. What happened?
Uriarte: We haven't really improved the offer. What we've done is adjust the offer to the necessities of this operation. We've simplified it. Before, we had agreed with Bancomer to come up with a financially complex offer.... What we've done is eliminate all that and put down a much more simple offer that is pure, solid capital.
Second, we have completed the offer, because when we made the first offer, we hadn't included Banca Promex in the offer because Bancomer only acquired it on June 1. That explains the greater size of the capital issuance.
Third, we have taken into consideration Bancomer's future capitalization needs, so that it can be absolutely certain it will be able to carry out its expansion project. So we've kept our word with our partners and at the same time have offered the market a visually more attractive offer.
Q: It sounds as if you were really driven by the analysts' opinions. They overwhelmingly had favored Banamex's offer over BBVA's initial offer.
Uriarte: These 40 days of suffering and wandering through the desert, these 40 days of Biblical fasting have been good for us, they gave us time to reflect on the opinions that we've picked up from the market. We are a bank oriented to create value for our shareholders, so we have no problem modifying our offer. With the first offer, we could have reached an agreement to issue more capital if we had needed to for an expansion
project.
So what we've done is tried to adapt our initial offer to the logical development of events in Bancomer's evolution and, in doing so, calm the markets and send out the message that we are betting on an expansion [of Bancomer]. We are sending out the message to Mexico's authorities and to the country that Mexico is going to have a perfectly healthy, safe, and well-capitalized banking leader.
Q: And presumably, it was very important for BBVA to win Bancomer, since your archrival Banco Santander recently bought Mexico's third-largest bank, Banca Serfin, no?
Uriarte: If you'll permit me to say this, in the opinion of the market we are smaller than Banco de Santander, but we are worth more than they are. We're worth $6 billion more than Santander is in the market even though we're 10% smaller. But we have been in [Mexico] since 1992 [when it purchased Banco Probursa]. We don't take actions like this based on the reactions of our competition.
What we do like is to beat the competition, and the enormous benefit of this operation for Mexico is that it permits us to build a solid, healthy leading financial group that will allow the Mexican authorities to show the rest of the Mexican banks a financial group that already fulfills capital requirements for the year 2003. I believe it will have a healthy copycat effect.
It's very important that in Mexico, an international investor has been able to handle a situation as complex as an unsolicited offer by Banamex, which was hostile toward BBVA, without having any political interference [from the government]. This is unusual anywhere in the world, including Europe. Mexico has thus demonstrated that it can handle these complex situations in an absolutely professional way. This is good news for Mexico.
Q: How many Spaniards will you be sending in to handle this operation?
Uriarte: This is a Mexican project. Bancomer has more than 35,000 people, and I don't think we'll have more than 3e Spaniards per 1,000 [employees]. And eventually, the idea is for the Spaniards to disappear from Mexico and from the rest of Latin America. In fact, there are more Mexican employees [35,000] in Bancomer than there are in BBVA in Spain, where we have 33,000.
Q: Mr. Guajardo, are you anticipating any objections to the BBVA deal on the part of minority shareholders at the planned shareholders meeting June 29?
Guajardo: No, we definitely don't anticipate any objections. We believe that the structure [of the deal] in financial terms is very attractive. The markets have given it a good reception. We'll try to talk to [minority investors] individually, if possible, to clear up any doubts.
Q: What will happen to the Bank of Montreal, which has held a 16% stake in Bancomer since 1995?
Guajardo: We're still discussing this with them. Bank of Montreal made the investment at a difficult time in Mexico's [history], and the fact that they did so at a difficult time means they did it at an attractive price. So from a financial point of view, it shouldn't represent a problem for [them]. On the contrary, it represents a positive evolution of its investment in Mexico. In the coming days we will see how the Bank of Montreal's participation evolves.
Q: What will become of your plans to reach out to the Hispanic market in the U.S., which you were exploring with the Bank of Montreal?
Guajardo: We had preliminary plans on the possibility of doing some business in the U.S., principally in the Hispanic community, but those plans were not yet in place. It's evident that it's an attractive market, where Bancomer should be. We have an important program in the U.S. that we are offering with great success, but in which the Bank of Montreal hadn't yet participated. And we had been studying and had preliminary plans to do other deals in the U.S., mainly with the Hispanic community, but they were not under way yet.
Market studies show that Bancomer -- and I should say Banamex as well -- are brands that are better recognized [by Hispanics] in [the U.S.] than any U.S. bank is. We have some agreements [with the Bank of Montreal], and obviously those agreements must be respected.
Q: Mr. Uriarte, how important is the Mexico acquisition compared to the rest of your Latin American strategy?
Uriarte: BBVA-Bancomer is going to be the anchor for all of Central America, for Mexico, and for the [U.S.] Hispanic market. And within Latin America, BBVA has the possibility of being the leader in practically every country, apart from Brazil. We're trying to create a Euro-Latin American group. This operation [with Bancomer] is the Latin American component.
Q: Bancomer has twice as many employees per branch as the BBVA does. Are you anticipating major layoffs in Bancomer?
Uriarte: The BBVA-Bancomer fusion is one of expansion. We're doing it not to reduce costs, but because we believe it's a fantastic opportunity to expand in the region.
EDITED BY DOUGLAS HARBRECHT
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