Cover Story: Euromoney, January 1999
Latin America: Decline of an Argentine dynasty
Bunge Y Born, the grain-trading and food dynasty, typifies many Latin family firms faced with global competition and calls for more transparency. It's time for the corporate financiers to come and carve it up. But the family feuding goes on

Decline of an Argentine dynasty

Many of South America's business families are weary. They have survived wars, military dictatorships and debt crises but the arrival of foreign competition is proving the final blow. Lacking an heir both willing and able to take on the modernization task, they are selling out - often to private equity funds in deals brokered by corporate financiers. The latest to start the process is Bunge International, the giant soyabean to branded foods conglomerate, started by European immigrants to Argentina at the end of the last century. So far it's been a painful retreat in which shareholder disputes long hindering Bunge's performance have carried on over a recent asset sale. Brian Caplen reports

The fourth generation of Bunge's family shareholders are a talented lot. They went to the best schools, have a stack of qualifications and are climbing the ladder in tough and demanding professions. Some work for Wall Street investment banks. Yet not one among them has come forward as a candidate to take Bunge - an international grain and oilseed trader with a gross annual turnover of $13 billion - into the next century.

Why? Because the depth of management prowess needed to modernize an old-fashioned conglomerate like Bunge and make it compete against the world's leading multinationals is beyond the wit of all but a few superhuman individuals - such as Bill Gates, Jack Welch or Lee Iacocca. The chances of spawning one of these in a family dynasty are remote.

That's not the only problem. Messrs Gates and Welch may have challenges aplenty but they don't have to deal with feuding shareholders of their own flesh and blood or with individualistic executives who unwisely get the firm involved in Argentine politics. They haven't had to move the company headquarters from Buenos Aires to São Paulo following the kidnapping of key family members, and when they commission a consultant's study of the business it doesn't wind up starting a family row. These are the pressures dealt with by family leaders of Bunge International over the past two and a half decades that have left them fatigued and wanting to sell.

Last May Bunge announced it was unloading its entire consumer food businesses with a total turnover of $3.5 billion - consisting of Molinos Rio de la Plata, Argentina's biggest food company; Santista Alimentos of Brazil; Venezuela's Gramoven and Bunge Australia - to concentrate on agribusiness.

Bunge is not alone in its desire to retreat. Across South America the era of the family-business conglomerate is drawing to a close and the frontrunners to take them over are multinationals and private-equity firms. With regional stock markets performing poorly, private equity has become the favoured route for portfolio investors to get a slice of the action. Money is pouring into these funds which after making acquisitions often go on to sell some of the assets to industry players. This break-up process is providing great opportunities for corporate financiers and, in the case of Bunge, more than a little controversy. One of the bidders, US private-equity firm Hicks Muse Tate & Furst, complains it was misled over the sale and that the rules were changed halfway through. Hicks Muse president Charles Tate says he expected better of Credit Suisse First Boston, the investment bank engaged by Bunge to handle the sale. Other bidders, however, say the sale has been handled correctly.

"We were asked to bid for the whole thing [excluding Bunge Australia]. We put a huge amount of effort into the due diligence, and spent probably more time on it than for anything else we have done this year [1998]," says Tate. "It requires us to commit an enormous amount of capital to a part of the world which is currently in turmoil. There is nobody else in the world who has got that kind of equity [$350 million] to put into Latin America. But our offer [valuing the assets between $1 billion and $1.5 billion] wasn't treated seriously. The whole process just took a turn that made no sense. We didn't hear anything, then we got a call saying something like, 'forget about Molinos [the Argentine part] what would you give us for Venezuela or Brazil?' "

Tate says that for every 20 deals Hicks Muse looks at only one comes to fruition and losing the transaction is not the issue. "Because we are serious people, we expect to be treated seriously. We expect people to do what they say they are going to do. We don't like it if they change the rules on us." Tate adds that to bid for a Bunge company again Hicks Muse would require greater assurances in future that the firm's time would not be wasted. On the role of CSFB he says: "It's an important institution. We expected more from them."

CSFB declined to comment but it seems clear that the Hicks Muse offer fell short of what the shareholders wanted. Since CSFB is mandated to get the best price for the owners it would naturally be working towards that goal.

For Bunge this brickbat is unlikely to make much impression. The company has been in turmoil for the entire 1990s as Octavio Caraballo, a descendant of the Hirschs, one of five main shareholding families, has struggled to make Bunge face the realities of deregulation and globalization.

Elephantine underperformer

Alejandro Quelch, research associate with Capital Markets Argentina, explains the challenges Caraballo faced and why Bunge may have decided to sell. "Molinos is an enormous elephant. It enjoys strong brand recognition and more than 100 years of tradition but it doesn't produce the level of profits you would expect from such a large company," he says.

"They give you a lot of blah blah in their financial statements but the information is so condensed it's difficult to see what is happening. It's a very traditional company which hasn't adapted to the changes in the Argentine economy. Other groups such as Perez Companc and Techint took advantage of the new situation but Bunge never did."

"The idea I have is that the shareholders have disputes among themselves and that this comes down to the management. Maybe the shareholders don't get along so they don't have clear polices to keep the company growing. The shareholders are very rich people [some] with farms who live well. Maybe they just want to do that [farming]."

Caraballo, who declined to be interviewed, loves the cattle business and is one of the largest landowners in Argentina. He has so much acreage that "it would take a week to fly over it" says a family friend. His private company Las Lilas produces some of the best meat in the world and runs two upmarket restaurants in Buenos Aires. Caraballo's favoured lifestyle is that of the country squire who enjoys roaming around his estate in old clothes, say friends.

Despite this Caraballo was always passionate about Bunge and made huge efforts to bring it kicking and screaming into the 20th century. To even attempt this he first had to oust existing chief executive Jorge Born, a member of another key family, whose involvement with the incoming Peronist government of Carlos Menem in 1989 scandalized other shareholders. But while Caraballo is credited with bringing in outside professional management and getting Bunge out of non-core areas, the end result is not a thriving Latin American food multinational with integrated trading, processing and manufacturing, as it clearly had the potential to become.

Former Bunge executives say the 1990s were characterized by consultants poring over the firm making recommendations, by constant restructuring and 90 degree shifts in strategy. This produced confusion even among senior management. A former Molinos employee recalls a senior executive declaring: "I don't know. I have been here two years and I still don't understand what our core businesses are supposed to be." Another ex Bunge executive describes it as "a comedy of errors".

But the final outcome is something worse - analysts say Bunge is selling the wrong parts at the wrong time and in the wrong way. Roger Heale, who used to cover Molinos as a researcher with West Merchant Bank, which has now closed its Latin equity research operation, says: "Five years ago they went heavily into agribusiness. Then they sold out of that and went into foods. Now they are getting back into agribusiness. It makes no sense."

Diego Barbero, general manager of Pecom Agra, the Argentine joint venture involving US food company ConAgra, one of Bunge's rivals and a bidder for its consumer food business, is amazed: "It was a major surprise to see Bunge decide to exit the consumer-food business because that is exactly what they had earlier said they would concentrate on. Bunge is now putting its faith in a single commodity [soyabean]."

Ill-timed return to the roots

Rather than focus on the value-added consumer business, as Bunge said it was doing in the early-1990s, the company is now reverting to its roots as a grain and oilseeds trader and processor, placing itself head to head with US giants Cargill and Archer Daniels Midland in a low-margin, high-volume, volatile business. Bunge is doing this just as the Latin American consumer is coming of age and the combined Mercosur market offers huge upside potential.

How could things go so badly wrong? The only way to understand Bunge, and companies like it, is to look at the negative influence of family shareholders as their numbers increase and the disputes multiply. Bunge has around 180 shareholders - the main families are Hirsch, Bunge, Born, Engels and De La Tour - spread worldwide. As parts of the Bunge empire floundered they undoubtedly became dissatisfied but were unable to act in concert to put things right. And where Bunge has listed entities - Molinos in Buenos Aires and Santista in São Paulo - minority shareholders felt completely out in the cold and unable to bring influence to bear.

Says Martin Pradier, an analyst with Deutsche Bank Securities in Buenos Aires: "Molinos has not been making good returns and investors have been asking: 'Where is the money going?' Molinos does not have the best reputation among investors. Some investors think that Bunge has not been straightforward with them but there is no evidence of anything more than that." Molinos's stock price rose significantly when the sale was announced last May, giving an indication of how the market views it. Molinos reported a loss of $837,000 for the first nine months of 1998 and returns on equity have been low for several years - 8.5% in 1996; 6.3% in 1997.

Santista lost R37.87 million ($31.55 million) in 1997 although the casual reader would have a hard time discovering that from the annual report which, after pages of glossy pictures of cakes, pasta and salads, devotes just half a page to "result analysis" saying that "gross profit fell by R56 million as a result of these factors". Net income is not mentioned.

Ill-will between minorities and family companies is common all over Latin America indicating that shareholder value is not always top of the corporate agenda. This also explains why at this stage of the region's development private equity, as a vehicle for portfolio investment, is triumphing over public markets. Backing a private equity fund like Argentina's Exxel Group, which is a frontrunner to get Molinos, is a way for investors to be certain that management will be brought to task.
A break-up planned?

Buenos Aires banking sources say that Exxel is currently trying to raise a $1.5 billion equity fund for the purposes of buying 55% of Molinos (valuing the company at around $900 million) and that a bridge loan is being arranged by Chase. One view is that acquisition by Exxel could lead to Molinos being delisted and further broken up, a trend that further shrinks and downgrades the stock market in terms of Argentine capital raising.

Bunge had the potential to be a regional blue chip in which all serious institutions would need to be invested. Instead it wound up as a sprawling monster with a culture of secrecy that extended even to the public entities. The financial results have been so disappointing that in the case of Molinos many brokers have stopped covering the stock. "In theory the Molinos story, with its involvement in agriculture Argentina's backbone, should be a great story, but I don't feel able to recommend it to anyone," says Chris Ecclestone, a director of the investment bank Buenos Aires Trust Company.

The story of the rise and decline of Bunge y Born, one of South America's most illustrious business dynasties, has all the ingredients of a best-selling novel. The backdrop is the secretive world of grain trading in which controlling the lines of supply can win wars and bring down governments. The plot begins with European immigrants arriving in Argentina in the late 19th century just as the pampas are being turned into wheatlands. Families join forces and together create a company that remains today one of a small handful - Cargill, Archer Daniels Midland, Louis Dreyfus are the others - dominating the world grain and oilseed business.

For decades everything Bunge touched turned to gold. The owning families were united and the business savvy of the founders passed down the generations. Bunge expanded into industry and in the closed markets of Argentina and Brazil moved ahead on every front - textiles, paint, tin cans, chemicals, fertilizer, banking, insurance, real estate.

But along the way tragedy struck. In September 1974 during a period of acute political turmoil in Argentina, two members of the third generation, Jorge and Juan Born, were kidnapped by the Peronist extremist group, the Montoneros, and held hostage for six months. The $60 million ransom was one of the largest ever paid and the kidnapping was a factor paving the way for the Argentine military coup in April 1976.

"The military would have been worried that all that money was going to buy arms. It's fair to say that the kidnapping was a factor in triggering the coup," says Colin Lewis, an associate professor of Latin American economic history at the London School of Economics. "The kidnapping was also significant because Bunge y Born was an Argentine company whereas most kidnappings at that time were against executives from multinationals."

From here on families that always kept a low profile became even more secretive. Their discomfort was acute when, in 1989, the released Jorge Born, by then president of the company, began working closely with the newly elected Peronist government of Carlos Menem. Bunge provided Menem's government with its first two economy ministers, putting the company into the political limelight for the first time in its history.

Back then a Bunge president was expected to hold the job for life but Jorge's actions, together with the company's poor business performance, so upset other shareholders that he was ousted and replaced by Octavio Caraballo. In this battle Jorge's brother Juan sided with Caraballo, but on one account the true kingmaker was an old lady from the De La Tour family living in Paris holding a critical block of shares.

Calm never returned to Bunge and the rest of the epic is a tale of arguments within and between families as Caraballo struggled to modernize the company but failed to find a consistent winning formula. As with every good novel there is a final twist in the tale. Unperturbed by the families' misgivings about his choice of bedfellows, Jorge Born has started working with one of his former kidnappers, Rodolfo Galimberti, in a venture called Hard Communication. The Born/Galimberti alliance has shocked the whole of Argentine society and in its escalation of the Stockholm syndrome - in which former prisoners identify with their captors - has been dubbed "the Buenos Aires effect".

Although the group's problems only became public with the ousting of Born in 1991, things had been going wrong for some time. The death of past president Mario Hirsch - regarded as a business genius - in 1987 was a body blow. "After the death of Hirsch the organization began to relax and the discipline went," says Luis Majul, author of Los Duenos de la Argentina (The Owners of Argentina), which contains a section on Bunge. "The second factor was the multiplication of the shareholders. At one time family members were not made shareholders unless they were very professional and very bright. Caraballo with more or less success tried to make the organization more professional, but in his first two years things were so chaotic that it cost a lot just to make basic changes."

Short-term success

Hirsch had economic trends on his side. Bunge's move of headquarters from Buenos Aires to São Paulo, following the kidnapping, coincided with the Brazilian miracle of high growth rates until it ended in the 1980s' debt crisis. In a huge, fast-growing and closed market like Brazil it was possible to succeed in almost any business Bunge invested in. At one stage Bunge had hundreds of companies of all shapes and sizes and was one of Brazil's largest employers. Bunge's then property company Lubeca built six new office blocks in the Santo Amaro area of São Paulo. "When we started here 20 years ago it was almost a jungle and people thought it was a daring project," says Carlo Lovatelli, Bunge's corporate affairs director in Brazil. At that time Bunge occupied an entire block of eight floors. Now with the recent departure of Santista's administration it is reduced to three floors.

The economic crises of the 1980s followed by the liberalizing governments of Collor in Brazil and Menem in Argentina in 1989 ended that run of success. Suddenly the economic tide was turning and old-fashioned industrial conglomerates would need radical overhaul to survive. Perhaps it was a desire to be on the inside track of these changes that persuaded Jorge Born to provide Menem with two economy ministers. The first, Miguel Roig, died days after the new administration took office and was succeeded by the head of Bunge y Born in Argentina, Néstor Rapanelli. "The involvement of Bunge in Argentine politics was very bad for the company's image," says Julio Villalonga, economics editor of the Argentine current affairs magazine Noticias. "Other companies thought that Bunge would get all the privatization assets and they were very upset. It was a public relations disaster."

One of Caraballo's first moves at the helm was to commission McKinsey & Co to do a complete study and make recommendations. This slowed things down at a time when speed was of the essence and after much deliberation McKinsey came up with answers that were obvious to many Bunge executives - bring in professional management from outside and concentrate on the core food and agribusiness.

This led to the recruiting of senior figures from leading multinationals. Bunge's chief financial officer, Alberto Weisser, worked for Basf in Mexico, Germany and the US; the boss of Molinos, Jorge Castro Volpe, came from Pepsi's Argentina operations; and Bunge's new chief executive, Oscar Bernardes, was the former Latin American president for consultants Booz Allen.

The key hire though was Ludwig Schmitt- Rhaden, the current chairman, who joined as president in 1994. He had worked for German multinational Degussa as their chief executive in New York and Brazil. Described by Lovatelli as a jogo de centura (solid person) it was Schmitt-Rhaden who embarked on the first great Bunge restructuring. Many non-core companies were sold in this period such as Bunge Paints to ICI, household chemicals firm Compania Quimica to Procter & Gamble, Atanor petrochemicals to Albaugh of the US and Brazilian IT firm Proceda to the Argentine Macri group. Banco Santista was sold to Brazil's Vigor group, renamed Banco Industrial do Brasil and is now emerging as a successful niche bank focusing on medium-sized corporates.

"Schmitt Rhaden was the man who with his leadership conquered everybody," says Lovatelli. "Today there is an understanding and harmonious relationship between the shareholders, the board and the principal executives. Decisions are taken in a collective way and there is always consensus."

Others see things differently. Says one family friend: "The Borns hated the McKinsey study because it said get the family out. Thereafter it became difficult for the younger generation to get anywhere in the company. They couldn't even get a salary raise. They were told, 'you're a shareholder'."

A particularly bad year for the Borns was 1994 when Bunge International was created as the main holding company in which the families have shares. This Bermuda-registered vehicle in turn holds the main businesses, replacing antiquated structures in which individual shareholders had stakes in all the different Bunge companies. Only in Argentina does the Bunge y Born name still exist. This company is held by Bunge International and in turn holds the Molinos shares. At the company's old headquarters in 25 de Mayo in Buenos Aires an engraving of the name over the front doorway is starting to fade.
The new generation of Borns enjoy a wealth of skills. Santiago Born - nephew of Jorge - who once worked for Bunge in both Argentina and Brazil is now in corporate finance with Bankers Trust in New York. Roberto Engels, a noted tennis player with an MBA from Harvard, used to be a manager for Argentine oil company YPF in Peru but now works and is a director for Hard Communication. The Engels and the Borns are linked by marriage in an earlier generation and Roberto has continued the tradition by marrying, Jorge Born's daughter Mariana.

Educated but still family

Santiago Born's sister Virginia has an MBA from the University of Pennsylvania's Wharton School and works for ING Barings in New York, underwriting emerging market bonds. Virginia worked for the now disposed of Bunge company Quimica in Argentina before doing her MBA. And Engels' brother William, who is a finance manager in Quilmes in Argentina, also attended Wharton and at one time worked for Citibank.

Was it right to keep them in the background at Bunge? Probably - says a senior Argentine executive with experience of family companies: "Yes they may be good but are they Jack Welch? Hell no. You couldn't expect Jack Welch. It would be an extraordinary piece of luck, but when you get to that level of complexity that's what you need."

This executive adds that it's extremely difficult to have only the talented members of the family involved. "How can you tell a family shareholder that his son or daughter is not capable whereas someone's else is?"

The family arguments have carried right through until the present. According to one source the younger, more business-savvy generation of family members were against the sale of the consumer food businesses. The chief dissenters are said to be Santiago Born and Roberto Engels. When contacted, Santiago Born refused to comment and Roberto Engels said he held no shares and was not involved in Bunge.

If Santiago and Roberto are against the sale it signifies some new fault lines in the owning families that were not apparent before. Santiago is the son of Juan Born who is known to favour the sale. Juan Born is a quiet, reserved character in contrast to his more flamboyant brother Jorge. Friends say there were strong differences between them even before Juan's siding with Octavio Caraballo to oust Jorge as president in 1991. Their varied reactions to the 1974 kidnapping illustrate this point. Juan was apparently the worst affected mentally at the time but now rarely talks about it. Jorge appeared nonchalant on release even worrying aloud whether his servants would have his home prepared for his unexpected arrival, according to Dan Morgan in his 1979 book Merchants of Grain. Roberto Engels is working with Jorge in Hard Communication but is allied to Santiago in opposing the sale of Bunge's consumer food assets. It is not known what Jorge's position is but it seems this particular conflict is more generationally based than between family branches.

"The boys used to discuss among themselves what they would do with the company when they grew up," says a family friend. If Roberto Engels' claim that he has no shares is correct - presumably they are held by his father - then it looks as if the company may be sold out from under the fourth generation before they get their chance to have a real say. Says another observer: "There is no open fighting [between family members]. On social occasions they are all very civil towards each other but there is a lot of backroom stuff."

The pitfalls of agribusiness

The fights have certainly not ended yet. Bunge's reversion to agribusiness presents it with some key problems that are bound to tax the shareholders' patience. First, gross margins are low - around the order of 1% and 4% in grain trading and processing, according to other players. Second, it's essential to have enormous economies of scale. Bunge has these but with the industry undergoing consolidation, as illustrated by the proposed purchase by Cargill of Continental's grain assets, the definition of big is changing. Third, Bunge's strength has been its South American origination but in recent years other firms have established there too. Fourth, a lot of money has been made in the past out of financial arbitrage rather than grain trading. With Brazilian wheat imports, for example, situations have arisen where final payments have been received long before the suppliers need to be paid, allowing considerable financial profits to be made in the middle. But as economies such as Brazil's settle down and interest rates fall these opportunities may disappear. Fifth, the risks in the Brazilian soyabean business are high. Processors often supply farmers with fertilizer, later taking crop in payment. But if farmers are hard pressed they may switch their output to someone else. Recovering the losses can be extremely difficult.

Senior management argues that trading as opposed to processing is only a small part of what Bunge does. "If you look at Bunge's agribusiness and the make up of our revenue what you are calling trading is only a small component," says Weisser. "For example, we mine phosphate rock in Brazil, process it and sell animal feed based on phosphate." Weisser says price volatility is not an issue because margins are constant and that even if the price of the consumer foods assets is affected by the current economic climate so too will be any assets the company wants to buy.

Bunge's buying activities have caused almost as much consternation as its sales and signal that the May decision to get out of consumer foods was sudden. As recently as 1997 Bunge was still buying consumer foods businesses - a frozen-foods operation in Argentina from Cargill and a toasted-bread operation in Brazil for $4 million. While Bunge did in the same year buy Cerval, a Brazilian soyabean processor, it also temporarily shut down soyabean-crushing facilities in Argentina saying they were uneconomical.

Oscar Bernardes, CEO of Bunge International, admits neither to family feuding nor to strategic U-turn: "This is not a surprise decision. Bunge has been engaged in restructuring and finding its strategic direction for some time and a number of studies have been developed. This latest announcement has nothing to do with the family [shareholders]. It's a strategic decision to focus on agribusiness."

It's impossible to confirm this with the family as none of them would agree to speak to Euromoney. However, given the lack of any sound business reason for the sale, especially now during an emerging markets crisis, shareholder dissatisfaction looks the only candidate. That's confirmed by interviews with eight people with connections to the company or the family, based in São Paulo and Buenos Aires, who spoke on condition of anonymity.

They say the main reason for selling is that the shareholders feel they could do better things with the money such as investing in their own businesses outside the group. European shareholders have long felt dissatisfied that their dividends didn't match up to the wealth potential in Argentina and Brazil where Bunge managers, even middle-level ones, have enjoyed lavish lifestyles. The burden of attending shareholder meetings every six months in either New York, São Paulo or Buenos Aires, and the endless debates, may also have played a part.

Bunge - even under Caraballo - found it difficult to adapt to a world in which shareholders move their money to companies that provide the best returns. Its lack of attention to costs gave it the feel of a state company rather than a private concern. "Managers lived well and even middle managers had two chauffeurs," says one source.

A multicultural company

It was also always decentralized and secretive. "In the past people wouldn't admit that Sanbra [cotton and oilseeds] and Santista were owned by the same company," says an ex-Bunge manager. Says another: "Each Bunge company had its own culture and they were all separate. Managers in paints didn't know what was happening in textiles and textiles didn't know what was going on in flour mills."

Apart from Hicks Muse and Exxel the other companies said to be interested in the consumer foods businesses are Brazil's Perdigão and Vigor companies which have been linked with Santista; Conagra which at one stage discussed a joint bid with Exxel and Hicks Muse; and Cargill which has now bought Gramoven for an undisclosed amount showing that the assets Bunge doesn't want are indeed worthwhile to its competitors. Bunge's Australian milling and baking business (Bunge Defiance) was sold for A$428.5 million ($270 million) in December to Goodman Fielder.

Although Hicks Muse is the only bidder prepared to speak on the record about the sale process, other bidders have stated off the record that it seemed a bit inflexible but that the documentation did leave open the option to sell parts individually. "We never insisted on selling all the companies together," says Bernardes, "that is something the market has always been confused about." All the same the sale has proved more challenging than most with negotiations dragging on as Euromoney went to press amid reports of bidders talking directly to shareholders rather than going through CSFB. One complication, say Buenos Aires sources, is that Mario Hirsch's widow Helena has a 10% direct stake in Molinos and there have been discussions about her treatment as a minority holder.

The next stage of Bunge's development could well be the shifting of its HQ from São Paulo to the US and a listing on the New York Stock Exchange with the family retaining control. "We are still analyzing how we will organize things [after the current asset sale]," says Bernardes. "There are a number of alternatives we are looking at but there is a strong possibility of a New York listing." Whether investors will flock to what's left of Bunge remains to be seen.

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