Peru a governance test shy of frontier status

By Rob Cox
October 20, 2015

The author is a Reuters Breakingviews columnist. The opinions expressed are their own.

Peru’s economy is set to expand 2.4 percent this year and 3.3 percent next year, the International Monetary Fund predicts. No other sizable nation in Latin America will match that, though by Peru’s recent standards it’s ho-hum. Yet the gurus over at MSCI, the U.S. company that compiles indexes global investors use to allocate capital, are threatening to downgrade Peru to the status of Nigeria and Pakistan. An unlikely antidote may come from that most Yankee of multinationals: Coca-Cola.

The Atlanta-based purveyor of sugary soft drinks has engineered a sweetheart deal that will allow one of its primary bottlers south of the border to take control of Lindley, its affiliate in Peru, for $910 million. The Coke transaction adds a new low to a classic Latin American stock-market tradition whereby controlling shareholders cash out at huge premiums, shafting minority investors. The Lindley affair offers Peruvian authorities a chance to demonstrate their mettle.

First, a little background. In September, Arca Continental, a leading Coke bottler based in Mexico, struck a deal to acquire Lindley’s outstanding voting shares, held by the eponymous founder’s family, for $760 million, or $2.46 a share. Arca also pledged to pay the Lindley family $150 million, or another 49 cents a share, not to compete in the business.

For Coke, merging bottlers is a strategic good that helps it push its syrup down the gullets of the globally thirsty as efficiently as possible. This deal also consolidates its 34 percent stake in Lindley with the 9 percent it owns of Monterrey-based Arca. The trouble is that Lindley has a whole other set of shareholders, owners of what are called investment shares in Peru, who got nothing in the deal.

About 11 percent of Lindley is owned by holders of these non-voting securities, created during a past military government to give employees some skin in the game. Today, Lindley’s investment shares are owned by well-heeled private investors who expect fair treatment. One of them happens to be Chile’s former President Sebastian Piñera. Another is the family behind Falabella, the largest department store chain in South America.

While the spectacle of the region’s plutocrats screwing each other may seem ironic, the investment shareholders have valid points, starting with the inequity of the arrangement. The Lindleys received the equivalent of $2.95 a share for their 53 percent of the company and an agreement not to compete. That’s almost four times the 74 cents at which the investment shares trade on the Lima exchange.

Lindley argues that the investment shares confer only economic, not voting rights, to their owners. But other companies have bought back investment shares at much smaller discounts. Moreover, it’s fair to question whether the deal aligns with the spirit of Coke’s code of business conduct, which strives for “acting with integrity around the globe.” Coke, led by Muhtar Kent, defines this as “doing what is right. By acting with integrity, we reflect positively on the image and reputation of the Company and its brands in the over 200 countries where we operate.”

Besides appealing to Coke’s promise to do the right – not just legal – thing, investment shareholders are working to get Peruvian market authorities involved. They argue that Lindley’s board, which includes Coke representatives, acted negligently in failing to consider the rights of all shareholders. They also contend that Lindley did not comply with disclosure requirements in announcing the details of the transaction.

Peru’s stock market regulators are generally regarded as relaxed – the country’s most recent corporate governance code, from 2013, is non-binding, for example. And the Lindley-Coke brouhaha is unfolding at a particularly inopportune moment for the Peruvian market. Just a few weeks ago, MSCI gave Peru until June to make the case that it is an emerging, rather than frontier, market.

The Bolsa de Valores de Lima, which is helping lead the fight against demoting Peru to a crew that includes such bastions of capitalism as Argentina and Zimbabwe, has estimated a downgrade could spark more than $5 billion of capital flight. MSCI is reconsidering Peru’s investment status in part because of reduced trading volumes. In September, the Peruvian Congress approved a law designed to promote greater liquidity on the exchange that, among other measures, eliminates certain capital gains taxes and creates incentives for market makers.

But many of the top companies in the S&P/BVL Peru General Index have investment shares outstanding. With the Lindley-Coke deal advertising the potential worthlessness of such securities, it is hard to imagine investors will be trading them with any enthusiasm. The stewards of Peru’s capital markets now have an opportunity to take up the interests of minority shareholders, and make the case that the country, like Chile, China or Poland, deserves the world’s capital. It’s either that, or Latin America’s fastest-growing economy of any size joins Jamaica, Bangladesh and Ukraine in the frontier club.

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