Queen Isabella Would Be Proud — and Worried

Spanish companies’ growth depends on former colonies | “Maybe they think they can abuse us” since the market does, too

Ben Sills and Randy Woods, with Manuel Baigorri in Madrid

Argentine supporters display a portrait of Nestor Kirchner


Grupo Ezentis is a Spanish engineering company that builds and runs phone and power-cable networks in Spain and Latin America. “About two-thirds of the company’s revenue comes from Latin America, and it keeps on growing,” says Chairman Manuel García-Durán. Without Latin America, Ezentis would be trapped inside the moribund Spanish market, where it’s losing money.

Ezentis is one of hundreds of Spanish companies with heavy exposure to the Latin American economy. Since 1992, Spanish corporations have spent $117 billion on Latin American deals, according to Bloomberg data. The acquisitions have been pretty constant, especially over the last 10 years, prompting journalists to dub the phenomenon the Reconquista, in reference to the conquistadors of the 16th century.

Spanish oil company Repsol’s $15.5 billion purchase of Argentina’s YPF was the biggest deal, while Telefónica was the most acquisitive company, spending $41 billion on 40 deals (see story, p. 24). Spanish executives wagered that the region had left behind the instability that saw Venezuela nationalize its oil industry and Chile seize its copper mines in the 1970s.

On the whole, the bet has paid off, though the Spanish had to ride out Argentina’s 2002 devaluation and debt default. Telefónica and Santander, Spain’s two biggest companies, generate almost half their sales in Latin America: Telefónica’s first-quarter profits from the region outstripped domestic profits for the first time ever. Spain’s 200 publicly traded companies generate 18 percent of their revenue in Latin America according to Bloomberg data — a vital prop to these companies as Spain struggles to grow.

Yet just when Spain’s faltering economy most needs the commercial empire it built in its former colonies, a tide of populism in some of the region’s most resource-rich countries is threatening its assets. In April, Argentine President Cristina Fernández de Kirchner seized control of YPF from Repsol YPF, claiming that Spanish executives let YPF’s output dwindle by skimping on investment. (Repsol denies this.) Bolivian President Evo Morales then sent in the army to take over the country’s power-grid operator, a subsidiary of Madrid-based Red Eléctrica. “We would not be surprised by more nationalizations,” Marcos Buscaglia, chief Latin America economist at Bank of America Merrill Lynch in New York, wrote on May 4. They “often come in waves.”

The historic dimension of the relationship, which dates back to a time when New Spain stretched from Cape Horn to what is now the U.S.-Canadian border, casts a shadow over dealings between Spain and its old colonies. “When things go well, issues are smoothed over. They forget that you were the old colonial power and you forget how incorrigible they are,” says José Ignacio Torreblanca, head of the Madrid office of the European Council on Foreign Relations. “The problem is when things go badly.”

The seizure of YPF is wildly popular among Argentines, who still burn from the condescension they felt from the Spanish over the years. When the Argentine congress ratified the seizure of YPF, a giant portrait of late President Nestor Kirchner, who wanted YPF back, was unfurled.

The expropriations “couldn’t possibly come at a worse time for Spain,” says David Lea, an analyst at Control Risks Group. Spain’s banks, most of its companies, and its regional governments have been shut out of the bond markets by investors concerned the country won’t be able to restart its economy, pay back its debts, and stick with the euro. Bolivia and Argentina “are taking advantage,” says Rafael Pampillón, head of economic analysis at the Instituto de Empresa business school in Madrid. “Maybe they think that since the markets are punishing us unjustly that they can abuse us as well.”

Mexico, Brazil, Chile, Colombia, and others have shown no sign of joining the anti-Spanish crusade. Santander, Spain’s biggest lender, has spent $13.7 billion building a bank network that runs from São Paulo to Mexico City. With Santander’s Spanish business damaged by the collapse of the property bubble and 8.9 percent of its domestic loans in default, the lender is tapping its networks in Latin America to raise cash — a sign the bank feels secure in most of its Latin markets. Santander’s Brazilian division raised $7.1 billion in the country’s biggest initial public offering in 2009 and now plans to sell a portion of its Mexican business. “This is a resource to finance ourselves,” says Marcos Martinez, CEO of the Mexico division.

While Spain’s Latin investments have prospered, its relative economic power has dwindled. Brazil pays 3.29 percent on its 10-year government bonds, compared with 5.79 percent for Spain. Brazil’s economy has almost doubled in real terms in the 20 years through 2011; Spain’s is contracting. A decade ago Spanish capital was eagerly sought in the region. Today most Latin countries have abundant foreign exchange reserves and strong banks. Relations with China are often far more important than links with Spain. “Latin America doesn’t need us anymore,” says Torreblanca of the European Council on Foreign Relations. “Now they are globalized, the relationship is pretty asymmetric, and in any asymmetric relationship you have risks.”

The bottom line Spain’s two-decade buying spree in Latin America is providing its companies with badly needed revenue and profits.


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