Mega-deals and Mega-problems: Brazil In Its Own World


2015-04-06 By Kenneth Maxwell

It remains a very odd phenomenon.

Brazil seems wedded to a very bad habit of navel gazing.

It is as if the rest of the world did not matter much.

It is as if all of Brazil’s problems were self-created or at the very least that they are the exclusive concern of Brazilians alone.

And as if they were all simply domestic political failings.

But this flies in the face of the reality of 21st century global dynamics.

It is true that President Dilma Rousseff apparently prefers to visit La Paz rather than Davos.

And clearly she enjoys hobnobbing with her fellow BRICS, rather than joining the international leaders who marched against the terrorist killings in Paris.

But Brazil is much more part of the world, whether or not Brazilian’s wish to notice.

To take one example which has raised a question about Secretary Kerry’s wife’s legacy company Heinz.

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Global deal making hit US$811 Billion over the first three months of this year, a 21% increase over the same period last year.

The biggest deal so far this year was the takeover of the US consumer food group Kraft by Heinz’s Brazilian owners, 3G Capital, to create a company worth $100 Billion including debt.

The deal did not involve relying on the services of a global bank, but did involve Warren Buffet.

It is a very good example of the ruthless cost cutting, managerial skill, and clever exploitation of international partnerships, that has marked the activity of 3G Capital from the beginning.

According to US News and World Report:

Kraft Foods will merge with Heinz to create the third largest food and beverage company in the U.S., and the fifth largest business of its kind in the world, which will have an annual revenue of $28 billion.

The companies announced the deal on Wednesday, explaining that the merger will be orchestrated by 3G Capital and Warren Buffett’s Berkshire Hathaway Inc., which worked together in 2013 to acquire Heinz. Berkshire Hathaway will also invest $10 billion in the new business.

The combined firm will be named The Kraft Heinz Company, and will have headquarters in both Chicago and Pittsburgh, and will control brands like Maxwell House coffee, Planters peanuts, Jell-O, Oscar Mayer, and Heinz condiments like ketchup. A merger of this scale may lead to more consolidation in the food and beverage industry.

We are told that Theresa Heinz Kerry won’t make money on this merger because she already sold her stock to those who did the merger.

Heinz Kerry, heir to the Heinz fortune (and wife of Secretary of State John Kerry), won’t personally profit from the merger, according to a Heinz spokesman and analysts who spoke with Heinz Kerry cashed out her company stock when Warren Buffett’s Berkshire Hathaway and 3G Capital acquired Heinz in 2013, Heinz said.

At the time of the sale, Heinz Kerry reportedly held less than a 1 percent stake in the company, an even smaller figure than the 4 percent reported by the Heinz company during John Kerry’s 2004 presidential campaign.

Following the Buffett deal, various outlets attempted to estimate the Heinz Kerry profit, resulting in figures of $671,520 (Business Insider) and closer to $1 million (AP).

Heinz Kerry’s net worth has been estimated at anywhere from $900 million to $2.3 billion. estimated John Kerry’s net worth in 2013 at just over $100 million.

Such international dynamics do not appear in the Brazilian mind set but are there nonetheless.

But if Brazilians can make mega-deals, Brazil’s problems are mega-problems, and they are also international in scope.

The Bank of England has begun a assessment of the global risks to test whether British banks were in a position to confront them.  Looking ahead over the next five years the BoE will explore six scenarios.

Four of them directly or indirectly involve Brazil. 

According to The Financial Times, the six scenarios include a slow down in Chinese growth from 7% to 1.7%; a rise of market volatility; a drop in the price of oil to $38 a barrel; a depreciation of emerging market currency against the US dollar; and specifically an examination of the results of Brazil’s decline.

One of the questions will be “how these shocks particularly effect emerging market companies that have dollar denominated debt and are not fully hedged, or do not match their liabilities with dollar assets or revenues.”

Of course some Brazilian companies, especially farmers, are benefitting from the depreciation of the Brazilian currency, the real, since they are paid in dollars, but their costs are paid in reals, and they have increased exports accordingly.

But Petrobras is caught up in an ominous cycle where it’s senior executives, past and present, are subject to charges of having violated US and Brazilian corporate law, and securities law, civil code, and securities and exchange regulations, in a revised complaint filed in Federal Court in Manhattan, where the Judge has combined the suits for securities fraud filed by investors who bought Petrobras American Depository Receipts.

It will be a field day for the lawyers.

As the English poet John Donne (1572-1631) wrote: “No man is an island.”

Certainly Brazil is not even if many Brazilians act like it is.

Editor’s Note: It seems there is a lot of parallel universe experiences going on.

For a look at how Russia and Iran live in different universes see:

Also see the article by Madison Marriage and Joe Leahy in The Financial Times published on April 5, 2015 about problems at Petrobras:

Problems for Petrobras, the Brazilian oil company embroiled in what is believed to be the biggest corruption scandal in the country’s history, show no sign of abating.

In the past two weeks it has emerged that several large institutional investors, including Dimensional Fund Advisors, the US fund house, and six New York City pension funds, are independently suing Petrobras for losses suffered as a result of corporate embezzlement alleged to have taken place at the company since 2004.