Brazil’s lower house of Congress approved the use of taxpayer money to finance election campaigns amid wide-spread disillusionment with the country’s political class in the run-up to 2018 general elections.

The Chamber of Deputies late on Wednesday approved a 1.7 billion reais ($542 million) fund that will be allocated according to each political party’s representation in Congress, according to the lower house’s news agency. Legislators cut the size of the fund from an initially proposed 3.6 billion reais amid a public outcry after years of corruption scandals involving kickbacks to politicians from public contracts.

To further assuage critics, the fund will be bankrolled in part by pork barrel spending traditionally earmarked for senators and deputies. The bill that had already passed the Senate now goes to President Michel Temer’s desk to be signed into law.

Legislators have struggled over how to fund Brazil’s politics, since a Supreme Court ruling in 2015 prohibited corporate donations. Widespread disenchantment with the country’s political elite has left the field wide open for next year’s elections and boosted the chances of outsiders at the ballot box.

New rules on how to distribute the election fund will benefit larger parties, and particularly Temer’s PMDB party, by allocating 15 percent of the fund proportionally to the seats held in the Senate. The rest will be distributed according to representation in the lower house, both current and that following the last elections.
Other political reforms passed by the lower house earlier this week include the end of electoral coalitions for legislative elections. Congress had also limited access to a separate fund to those parties that succeed in electing nine federal deputies or win 1.5 percent of the vote in nine of Brazil’s 27 states. The threshold will rise in subsequent elections.

The intent of the bill is to reduce the number of parties in Congress from currently 25, a figure that has made forging and maintaining governing coalitions a daunting task.

Source: Bloomberg

In 2008, seven years after setting up its first plant in Brazil, France’s Peugeot launched the 207, a car inspired by a model manufactured in Europe with the same name. The difference is that the Brazilian version was simpler. The plan was to adapt a European automobile to an emerging market and compete in the 1.0-liter segment with automakers that had arrived here before. But the French brand’s market share in Brazil has never gone much beyond the 1.3% achieved last month.

Almost ten years later, Peugeot global CEO Jean-Philippe Imparato acknowledges that the strategy was wrong, and promises that from now on Peugeot cars sold in Brazil will be the same as those of Europe. “There is no reason for a different range. There is no small country, small region or small client,” he says. Mr. Imparato has been working for the PSA group, which controls Peugeot and Citroën, since 1991. But when the strategy to align the Brazilian line to cheaper models was launched, he was Citroën’s sales head in Italy.

The French executive of Italian descent says that he sees in Brazilian consumers several similarities with the car-loving Italians. “In many countries customers who can buy cars want better, beautiful products, and are ready to pay for it.”

By “forgetting its story,” as Mr. Imparato says, Peugeot has moved away from customers. But this has not happened in Brazil alone. The new strategy aims to raise Peugeot’s sales share outside of Europe through 2020 to 50% from 42% in 2016. Iran is already a bigger market for the automaker than France. A new pickup truck was launched in Tunisia a few days ago, and in ten days a van manufactured in Uruguay will be launched on the Brazilian market, in partnership with local producer Nordex.

The mission to lure Brazilian consumers is headed by Ana Theresa Borsari, director-general of Peugeot do Brasil since October 2015. Strengthening the utility segment is one of her missions, and Expert, the van manufactured in Uruguay with capacity for a ton and a half of cargo, leads Peugeot to a new segment.

More than half of the carmaker’s dealership network has been renewed. In an attempt to “put an end to the myth that French-brand cars lose more value”, says Mr. Borsari, the company launched a loyalty whereby the dealer agrees to buy the vehicle when customers decide to exchange it for a new one.

On a visit to Brazil this week, Mr. Imparato dined with car dealers and heard several sad stories of the economic crisis. “These people who have lived through hell now look at the future with confidence,” he says. The executive plans to reverse Peugeot’s losses in Brazil in five years.

In Brazil, the PSA group manufactures Peugeot and Citrioën vehicles at a plant located in Porto Real, Rio de Janeiro, opened in 2001. Last year, PSA had a R$206.3 million loss, according to the balance sheet published by the carmaker in the Official Gazette of Rio de Janeiro. According to Peugeot, the group is profitable in Latin America. Mr. Imparato says that, in this industry, nobody can afford losing money. “If you lose, it’s time to change the business model.” he says.

On the eve of a change in the Brazilian auto sector’s industrial policy, the French executive supports less protectionist programs. “I believe a ‘grain’ of market liberalization would be good for the country.”

Source: Valor Econômico

French energy conglomerate Engie SA (ENGIE.PA) has appetite for more Brazil acquisitions, and will evaluate assets being sold by Eletrobras, despite spending more than $1 billion in a licensing auction last week, Engie’s local unit head told Reuters on Wednesday.

Brazil’s state-controlled utility Eletrobras, or Centrais Elétricas Brasileiras SA (ELET5.SA), said on Monday it will soon kick-start its divestiture plan which includes stakes in dozens of projects, mostly wind parks and power transmission ventures.

“We are open to opportunities, but always conservatively and with financial discipline,” Mauricio Bahr, Engie Brasil’s chief executive, said in an interview in Sao Paulo. “But our debt in Brazil is low so we have some room.”

“We would have to look asset by asset,” Bahr said, adding transmission lines could be of interest.

Brazil’s power sector is going through a process of consolidation, with many local players putting assets up for sale to cut debt as credit is tight. Brazil’s government has tried to attract foreign capital to help boost the economy by selling operating licenses for several projects.

Engie spent 3.53 billion reais ($1.13 billion) last week in a government-sponsored auction to win licenses to operate two large hydroelectric power plants in Brazil.

The assets will boost local operations which already contribute 18 percent to the company’s global results.

Engie and Eletrobras are partners in several projects, including the massive Jirau hydroelectric dam, a plant built in the middle of the Amazon jungle with capacity to generate 3,750 megawatts.

“I don’t know if they (Eletrobras) will want to sell Jirau, it depends on their appetites. But eventually it will be natural for the partners, who have the right of first refusal, to end up exercising it,” Bahr said.

Sourece: Reuters

Brazilian police arrested on Thursday the head of the national Olympics committee, who is accused of conspiring to bribe members of the International Olympic Committee (IOC) to pick Rio de Janeiro as host of the 2016 games.

Brazilian investigators say Carlos Arthur Nuzman helped arrange a $2 million bribe to get the games for Rio de Janeiro, where he was arrested early on Thursday. Police said he was being held in connection with crimes including corruption and money laundering.

 Marcelo Bretas, the federal judge who authorized his arrest, said new evidence indicated that Nuzman’s role in the alleged vote-buying scheme was “more relevant” than initially thought.
 “The accusation of vote-buying for the 2016 Olympics is unfounded,” Nelio Machado, a lawyer for Nuzman, told reporters. “Today’s measures are harsh and unusual.”

Bretas said in an arrest order that Nuzman’s wealth grew by 416 percent between 2006 and 2016 and that he had assets overseas that were only declared after the vote-buying investigation began.

The assets include 16 kg in gold bars deposited in Switzerland, Bretas said.

The IOC said on Thursday it would cooperate in the investigation. Its chief ethics and compliance officer has asked Brazil for information to proceed with its own internal investigation, which is ongoing, the body said.

“Given the new facts, the IOC Ethics Commission may consider provisional measures while respecting Mr. Nuzman’s right to be heard,” the IOC said, without detailing the measures.

Leonardo Gryner, a former director of the national Olympics committee, was also arrested in a new phase of the so-called Unfair Play investigation.

Police raided Nuzman’s home in September, accusing him of conspiring with politicians to buy the right to host the 2016 games. Sergio Mazzillo, a lawyer for Nuzman, said then his client was innocent.

 Source: Reuters

Not only will the Social Security reform be hurt by the second set of criminal charges against President Michel Temer. To avoid adding to the tense mood and the pressure on coalition deputies, the president probably will only sign the package of measures announced nearly two months ago to attain the 2018 fiscal target after the Chamber of Deputies votes on the charges, later in October.

The decision will pressure public accounts next year, which already feature a projected deficit of R$159 billion, and make them more difficult to pass. Out of four revenue-boosting measures supposed to generate R$14.5 billion, and out of five spending reduction efforts amounting to R$8 billion, only one, which doesn’t depend on Congress, has already been forwarded: freezing the rates of Reintegra, a tax break for exporters, which can be enacted by decree.

The tax increases, as well as the end of payroll-tax cuts for companies and a higher pension contribution from public workers, demand a grace period of 90 days between approval and becoming effective. Raising the pension contributions, which will yield R$1.9 billion, can start through a provisional measure (MP) that is effective immediately. But if the government insists on postponing it until November, revenues will only begin in February.

From the political standpoint, if the MPs had been forwarded in August, soon after being announced, they would be voted still this year because such decrees have a four-month expiration date. If they are enacted in November – the charges are expected to reach a vote in late October – the deadline would only expire in March or April when lawmakers have already immersed themselves in early campaigning in their states and governments face more hurdles to pass unpopular proposals.

Ending the payroll-tax cuts, which the economic team hopes to raise R$12.5 billion next year, faces two problems. The government already admits the potential revenues will be lower since the actual bill, already making its way through the Chamber, has stalled and was not fast-tracked, which would force a vote in up to 45 days.

The alternative would be signing a new MP on the issue in the waning days of December. The delay would cause the estimated revenue in 2018 to drop to R$8 billion. But it still needs to overcome resistance from business interests and lawmakers, who changed the original MP beyond recognition and ended up voting it down.

The package of proposals, which also includes postponing raises for federal workers until 2019, increasing to 14% from 11% the pension contributions of civil servants earning more than R$5,500, changing the taxation of investment funds, curbing housing vouchers and canceling raises to political appointees, is ready. It only lacks the presidential signature.

The proposals have been sitting for over a month. When Mr. Temer traveled to China in August, Chamber President Rodrigo Maia (Democrats, DEM, of Rio de Janeiro), who became interim president, found the measures on his desk but refused to take ownership of the damage from such unpopular proposals.

The president’s political negotiators said Mr. Temer was advised to hold off on measures affecting thousands of public workers, due to the fear they would trigger a wave of demonstrations and influence the Chamber’s vote on the charges. The strategy is to avoid controversy with deputies or to put even more pressure on lawmakers until the charges are voted.

Aides to the Chief of Staff, Eliseu Padilha, said he denied that the proposals were being held back and argued that they are under review by the legal counsel, who will define their format for forwarding to Congress (whether as bills or MPs), and that the review has no deadline.

An aide to President Temer admits the political timing recommends postponing the package’s congressional arrival. The aide argues that deepening the damage at this point would be innocuous because forwarding the fiscal package in November or December would not harm the effort. The aide points out the restructuring of civil-service careers, which projects savings of R$18 billion in five years. “Why would the government push forward the announcement of a postponement in civil-service exams, adding to its unpopularity, when there are no civil-service exams slated for this year?”

So far, the only bill demanding congressional endorsement that has advanced did so without depending on the government: the regulation of wages that surpass the civil service ceiling, of R$33,700. Mr. Maia created a special committee to decide the issue, which was passed by the Senate in 2016 and has been holding public hearings. The controversial bill, which ex-President Dilma Rousseff failed to pass, will be changed and face new debates in the Senate before some of the benefits are finally cut.

But even this proposal, which could generate savings of R$725 million a year, will have to wait for the charges’ deadline. The committee chairman, Deputy Benito Gama (Brazilian Labor Party, PTB, of Bahia) said the body would wait until late November to vote on a report. “We don’t want to mix things and seem like we are retaliating against the judiciary and the Public Prosecutor’s Office [which has the highest salaries],” he said.

Source: Valor Ecomômico

Striving to grow its fixed broadband service, TIM Brasil has undergone changes in its market profile in the last two years. No longer a company up for grabs among competitors, it is now a potential buyer of assets, and playing a bigger role in the earnings of controller Telecom Italia, says Stefano De Angelis, chief executive of the Brazilian unit. As he sees it, the recent pick of Amos Genish as the Italian group’s chief executive should put all eyes on TIM Brasil, due to the new CEO’s understanding of the Brazilian market.

Mr. De Angelis says that the company is prepared to invest in operations and that it has the capacity to take on debt, and therefore the acquisition of assets that will allow it to make strides in infrastructure are on the table. When asked  about the company’s interest in Cemig Telecom, Copel Telecom and Sercomtel, the executive says several companies are on TIM’s radar.

“TIM Brasil has debt of less than €1 billion, while the European majors in the industry, like Telefonica, are more indebted. Our leverage [as measured by net debt in relation to Ebitda] is just 0.8 times, while European competitors are leveraged 2 or 3 times. We have the capacity to take on billions of reais of debt,” he says.

The fact that Cemig officially put up its telecom subsidiary for sale could facilitate talks, but Mr. De Angelis preferred not to comment on whether they will make a binding offer. The telecom arm of the Minas Gerais utility in August reached 1,000 clients in about 100 cities in Minas Gerais, Goiás, Bahia, Ceará, Pernambuco, Rio de Janeiro, and São Paulo states. The company has an equity value of R$193 million.

In 2011, TIM bought Atimus, whose main shareholders were AES and BNDESPar, for R$1.6 billion. The main business of Atimus, which operates in São Paulo and Rio de Janeiro, was the rental of infrastructure to operators. Fixed-line telephony is the route of growth for TIM Live, a broadband service provided by the company that seeks to reach 400,000 subscribers by the end of the year, after ending the second quarter with 350,000 clients.

“Today, residential broadband penetration is the weak link in the country’s digitalization process. When we look at connection speeds, almost one third are below 2Mbps – that is, they can’t use high-quality video services. If we look at Brazil, there are cities with huge demand and poor supply. In light of this, tomorrow we may provide a package with ultrabroadband fixed and mobile services,” says Mr. De Angelis.

As for the possibility of buying Oi, he said this is “something completely off the table,” justifying his comment by saying that TIM’s rival is in such a complex situation that TIM wouldn’t even know how to analyze a possible transaction. “The company has a huge fixed-line operation, but it didn’t invest in the expansion of 4G coverage in recent years, and this was a weak point. Meanwhile, we have good 4G performance, in mobile telephony, and in fixed-line advances.”

Mr. De Angelis says that one of the biggest efforts will be in improving company numbers, which currently represent about 20% of Telecom Italia earnings. The trend is for Mr. Genish’s arrival to help the subsidiary gain prominence in operations, considering how Europe has yet to present exciting earnings. “Brazil represents an important part of the group’s business, like Vivo does for Telefonica, and we want to increase that.”

While 1% growth in Europe is celebrated, Brazilian revenue is growing about 5%, with Ebitda up 15% in the second quarter. For the executive, having someone in Italy who knows the Brazilian market well will help a great deal – after all, Mr. Genish was here for 18 years and presided over Telefonica Brasil and was responsible for the sale of GVT to the Spanish multinational.

The positive earnings outlook is confirmed by Credit Suisse, which issued a report indicating that TIM’s third quarter revenue could rise 5% from 2016, to R$4.1 billion. EBITDA could rise 13% to R$1.5 billion.

The TIM executive promises that the company won’t stand still as it deals with strides made by over the top (OTT) service providers. The company is looking at partnerships with content suppliers such as Globo, Netflix, and other domestic and foreign operators to offer services to clients, with the possibility of even offering products similar to Apple TV or Google Chromecast. They have ruled out investments in cable TV. The company already has a partnership with Sky.

Source: Valor Econômico

A unit of Brazil’s competition regulator Cade said the $66 billion takeover of Monsanto Co. (MON.N) by German life sciences firm Bayer AG (BAYGn.DE) could be detrimental to competition, a document released on the agency’s website shows.

The Bayer-Monsanto transaction, announced in September 2016, would create the world’s largest integrated pesticides and seeds company.The Cade unit said that anticipated merger-related efficiencies were insufficient to mitigate its competition concerns, according to the document dated Oct. 3.

 It recommended what it termed as “structural solutions” as a condition for final approval the deal, which will be in the hands of Cade’s seven-member tribunal.

The Cade unit said it had not engaged in an in-depth discussion with Bayer and Monsanto related to its suggested “remedies.”

Bayer said the unit’s opinion is non-binding and does not mean the transaction will be blocked. Monsanto did not immediately reply to a request for comment.

The unit said solutions included creating or strengthening another player to compete in the markets for soy and cotton seeds and in the sphere of biotech development.

Deal opponents have asked Cade to block it or force divestments including Monsanto’s Intacta RR2 IPRO soy seed technology and Bayer’s glufosinate ammonium herbicides.

Source: Reuters

Caixa Econômica Federal will sell a R$1 billion portfolio of foreclosed properties to a private-sector fund. The transaction is expected to close in a month at the most. Caixa has foreclosed on 39,000 properties worth R$6 billion this year alone and had been considering options to clean up its balance sheet. “We’ll sell R$1 billion to a fund, no later than next month. A private-sector fund wants to make a deal,” a Caixa executive told.

The bank has earned R$700 million so far this year selling foreclosed properties directly. Aside from shedding part of its property portfolio, the state-owned lender also is considering setting up a real-estate fund with the remaining repossessed properties and with housing units owned by the federal government. “We are working on creating a real-estate fund. I can put those [foreclosed] properties in the fund and may even add government-owned homes. But everything is still being studied,” the executive said.

The bank also has not ruled out selling the properties as it did in the past to Emgea, or Asset Management Company, a government entity created to absorb toxic assets. But the option is challenging because Emgea needs Treasury funds and other sources of taxpayer money, practically impossible amid the current budget crunch.

The executive said officials are concerned with the property market as a whole, hurt badly by the economic crisis and higher unemployment, and not with the potential losses from a R$6 billion portfolio of foreclosed properties, or with compliance with Basel III capital ratio rules. A higher ratio allows the bank to lend more.

Under Basel III rules, every bank needs to hold at least R$11 for every R$100 lent, or an 11% capital ratio index. Caixa’s ratio has been rising and reached 14.4% in late June, from 13.59% in March and 13.54% in December.

According to a source, the R$6 billion in foreclosed properties under discussion represent less than 1% of the bank’s mortgage portfolio, which rose 7% in the 12-month period ended in August to reach R$421.4 billion. The bank’s loan delinquency rate also remains low. Credit defaults increased by 0.7 percentage point in the 12 months ended July, to 2.5%, while the market average is 3.7%.

In addition to reduce its portfolio of foreclosed properties, Caixa also is trying to move forward on creating a “credit-card company.” The bank already started developing the model to be presented to the Central Bank. The state-owned lender has been consulting regulators to make the process more transparent. It wants to offer new services to its 80 million clients.

Amid the fiscal crisis, Caixa doesn’t expect to receive Treasury transfers this year and the next. “We need to make the company more efficient. Since Caixa will have to shrink, we already started cutting payroll and making branches leaner,” the executive said. “We are working to earn more respect for this company, especially abroad, by making it more efficient and free from meddling,” the executive said.

Source: Valor Econômico

Kroton plans make its first acquisition of basic-education school this year. The education company is holding talks with 16 schools and negotiations have reached due diligence efforts in three of them.

Brazil’s leading for-profit college, with a market share of around 15%, wants to attain the same share in so-called premium schools by 2022, according to people familiar with the business. Premium schools charge monthly tuition of over R$1,200. The tuition rises to around R$2,000 in São Paulo state and Rio de Janeiro. The R$25 billion a year premium school market generates 44% of the industry’s revenue.

The strategy adopted by Kroton is to purchase recognized brands in several states, expanding them and opening new units in the school’s market. The company wants to start with 600 students, rise that number to 900 in the second year of operation and enroll 1,200 to 1,400 students by the third year, which then would allow an operating margin of 30%.

Kroton wants to use the strategy for its Pitágoras school in Minas Gerais. It currently operates a single school of the brand in Belo Horizonte, in addition to a learning system adopted by around 220,000 students in 672 Brazilian schools.

But the real targets of Kroton are markets lacking premium-school options, which automatically sidelines the city of São Paulo. Grupo Eleva, controlled by 3G Capital founder Jorge Paulo Lemman, appears to be following the same path. Sources said Eleva recently purchased Nota 10, a premium school with units in three cities of Mato Grosso do Sul.

Around 6,300 schools throughout Brazil operate in the R$1,200 range of monthly tuition. Bain & Company data also show there are only 49 schools with more than 2,000 students, driving investor interest in the assets.

The possibility of offering extracurricular courses for the spare part of the school day also drives interest. This market generates R$40 billion a year. Kroton plans to offer English lessons and homework assistance, in addition to other activities including sports in partnership with specialized schools.

Kroton will not operate in the “super-premium” school market – the segment in which the likes of SEB and Eleva are betting strongly – where tuition costs around R$5,000 a month. On Tuesday SEB opened a unit of its premium school Concept in São Paulo, in the former building of Sacré-Couer school, which consumed investments of about R$75 million.

Source: Valor Econômico

A basket of pharmaceutical assets is up for sale in Brazil after both multinational and local laboratories revised their strategies, and as some plants show excess capacity. Together, these potential transactions could involve billions of reais in the medium term and, despite the recent correction in prices sought by sellers, the overall assessment is that available assets remain expensive.

According to industry sources, Rio Grande do Sul-based Takeda has put its Multilab laboratory up for sale. The transaction amount, excluding debt, ranges from R$90 million to R$100 million, well below the R$540 million the Japanese pharmaceutical company paid for Multilab in 2012. In Minas Gerais, Hipolabor hired a Brazilian bank to seek buyers willing to pay R$1 billion for the company.

There are also rumors involving different pharmaceutical and industrial units that supply both human and veterinary medicines that are awaiting a buyer.

TheraSkin, a maker of dermocosmetics, may have been put up for sale again for R$1 billion — according to a source, an R$800 million offer was turned down —, and Hypermarcas is allegedly looking for a partner, which the drugmaker denied “vehemently” a few days ago.

In the case of Multilab, sources said, the sales process is already underway and at least two investors have submitted non-binding offers to the foreign bank coordinating the transaction, likely to be completed in the short term.

One of the challenges to completing the sale more quickly, according to one of the sources, is related to regulatory problems with one of the lab’s main products: MultiGrip anti-flu capsules. On top of that, the company has a tax bill of R$120 million.

On the other hand, following the acquisition of Multilab, Takeda is said to have invested in the operation and modernized its São Jerônimo do Sul plant in Rio Grande do Sul. The decision to sell the asset, according to one source, is due to Takeda’s shift of focus in three strategic areas (gastroenterology, oncology and central nervous system), as well as to more vaccine research.

Multilab produces generic drugs, hospital medication, and over-the-counter drugs, which, according to another source, have not provided the return expected by the Japanese firm. Takeda Pharmaceutical, whose annual revenue totals around $16 billion, bought the Brazilian laboratory for a price considered high at the time — about 17 times EBITDA.

With the economic crisis and slow pace of growth in the pharmaceutical market, the industry’s assets are falling to “more real values,” according to source. Takeda said it did not comment on market rumors.

For industry sources, Takeda’s decision to sell the lab is similar to Pfizer’s decision to divest its stake in generic drug producer Teuto. In early July, the US multinational resold to the Melo family the 40% stake it had bought in the Brazilian laboratory in 2010 for R$400 million. The transaction value was once again well below the price paid for the asset.

Hipolabor, whose revenue amounts to R$500 million, also said it would not comment on market rumors. According to a source, the laboratory, specialized in the hospital segment, has been facing frequent suspension of its drugs by regulator Anvisa and has already been the target of investigations, the most serious of them for tax evasion, fraud in bidding, and adulteration of drugs in 2011.

On the other hand, the company has a plant that enjoys tax incentives in Minas Gerais, which could prove attractive during the sale process.

Another example of company shedding assets is Centroflora, the biggest Brazilian-owned manufacturer of extracts for phytotherapeutic drugs, which sold its nutraceutical division to Swiss giant Givaudan. The deal price was not disclosed, but the proceeds will help Centroflora move ahead with an investment program of up to R$95 million until 2020. The sale is expected to close in early 2018, and the companies will keep sharing a plant in São Paulo for up to five years.

The first stage of its investment plan includes transferring its research and development center to Campinas from Botucatu. The second phase will involve moving extract production to a new plant whose location has not been defined yet. Centroflora president Peter Andersen said the company wants to start building in the second half of 2018.

Mr. Andersen said Centroflora decided to split its business into nutraceuticals and phytotherapic drugs three years ago and is now focused on developing the latter. “Our big bet is on companies who want to develop those products and later the traditional extracts.”

Source: Valor Econômico