Colombia's Rich Lure U.S., European Investors
as Violence Ebbs

Sept. 27 (Bloomberg) -- Decades of guerrilla warfare and drug feuds created protected home markets for Colombia's biggest family- run businesses. A decline in violence may be undoing that.

President Alvaro Uribe's success in disarming rebels during his three years in office has spurred economic growth and attracted investment from outsiders such as food and tobacco company Altria Group Inc. and brewer SABMiller Plc.

To survive competition in an expanding home market, the country's richest families -- the Santo Domingos and Carvajals among them -- are opening their publishing houses, consumer-goods companies and banks to outside investors as they seek funds to take on competitors. Morgan Stanley and Citigroup Inc., both based in New York, are among their financial advisers.

Families will have to relinquish their absolute control over companies that have supported them for generations, says Alejandro Santo Domingo, whose father in July sold Colombia's biggest brewery, Grupo Empresarial Bavaria, to London-based SABMiller for $5.6 billion.

``People were scared of investing in Colombia, so that helped protect industries,'' says Santo Domingo, 28. ``Today, they are not.''

New York-based banks Lehman Brothers Holdings Inc., Morgan Stanley and Citigroup advised Santo Domingo on the sale. Merrill Lynch & Co., also of New York, was a financial adviser to SAB Miller.

Little Choice

Colombia's closely held companies have little choice but to sell shares or join forces with an international partner because their borrowing costs are much higher than those of competitors from Europe or the U.S., says the younger Santo Domingo.

The average annual interest rate that Colombian banks charge on a one-year loan to their most creditworthy clients is about 10 percent, according to data compiled by Bloomberg. In Belgium, home to InBev NV, the world's second-largest brewer, that rate is 2.8 percent. InBev last year acquired Brazil's Cia. de Bebidas das Americas, Latin America's biggest beermaker, for $11.2 billion.

Four decades of guerrilla warfare, erratic economic growth and less immigration than most other South American countries caused Colombia to miss out on much of the foreign investment that flowed into the region starting in the 1970s, says Carlos Davila, a professor of business at the Universidad de Los Andes in Bogota, the capital.

This led to the creation of companies, most of them family owned, whose market dominance is only starting to be challenged. After Grupo Empresarial Bavaria's sale, six of Colombia's eight biggest companies in terms of revenue are still family controlled.

`Way Behind'

``Colombia is way behind the rest of Latin America in this sense,'' says Davila, 61.

Uribe increased the number of troops deployed against guerrillas and drug traffickers to 374,125 from 278,796, with the result that homicides dropped 30 percent and kidnappings declined 50 percent, according to the Defense Ministry.

About 10,000 members of the United Armed Forces of Colombia, a paramilitary organization the government says is involved in drug trafficking, have laid down their arms, reducing its number to 4,000.

The Defense Ministry says officials have also persuaded almost 4,000 rebels from the Revolutionary Armed Forces of Colombia, or FARC, the country's biggest anti-government guerrilla organization, to stop fighting. In 2002, the year Uribe took office, the FARC had 16,900 members.

Expanding Economy

The increased security spurred consumer confidence and encouraged investment, helping the $95 billion economy, the fourth largest in South America, to expand 4.1 percent in each of the past two years. Growth of the economy, which depends on oil, coal, coffee and flowers, will continue at 4 percent in 2005 and 2006, the government estimates.

Alfredo Carvajal, chief executive of Cali-based Carvajal SA, says the 100-year-old publisher plans to raise capital to expand by selling shares in five of its units on stock exchanges outside of Colombia. At present, 180 members of the Carvajal family own the company, which is Colombia's biggest publisher. It has annual sales of more than $1 billion and units in 18 countries.

``Letting outsiders in is the only way to ensure the longevity of family-run companies,'' says Carvajal, 68. The company hasn't decided in which countries it will sell shares.

The owners of banking and financial-services companies Grupo Aval SA and Colpatria SA say they may take on partners or sell shares as they seek to compete with banks such as the local units of Spain's Banco Santander Central Hispano SA and Banco Bilbao Vizcaya Argentaria SA.

`Endeavor to Grow'

``We have to endeavor to grow, to expand inside and beyond Colombia,'' says Luis Carlos Sarmiento Gutierrez, 44, president of Bogota-based Grupo Aval, Colombia's biggest bank holding company, and the son of its owner, Luis Carlos Sarmiento Angulo. ``We might want to do it in the company of a partner.''

Eduardo Pacheco, 53, chairman of Grupo Colpatria, which owns Red Multibanca Colpatria, the country's sixth-largest bank by loans, says his company may seek a stock exchange listing to finance growth.

``At some point in time we are going to have to increase our capital base, then we will have to access the markets,'' says Pacheco, whose family controls Bogota-based Colpatria.

Last year, foreign direct investment in Colombia was $3 billion, 66 percent more than in 2003. A further $822 million was invested in the first quarter of this year, a 33 percent increase from a year earlier. In April, Philip Morris International Inc., a unit of New York-based Altria, bought Cia. Colombiana de Tabaco SA, Colombia's biggest tobacco company, for about $300 million.

Stocks, Peso Gain

Under Uribe, 53, Colombia's benchmark IGBC stock index has risen more than sixfold, while the peso has gained 17 percent against the U.S. dollar. Foreign holdings of Colombian stocks stood at $972 million in August compared with $246 million when Uribe took office.

The extra yield that investors demand to own the government's bond due in 2012, instead of a comparable U.S. Treasury, has dropped to 2 percentage points from an average of 7 percentage points in 2002, according to JPMorgan Chase & Co.

Still, local borrowing costs remain high, says Alejandro Santo Domingo. The lowest rate at which Bogota-based Grupo Empresarial Bavaria could borrow money was about 9 percent a year, while international companies have access to financing at about 3 percent, he says.

The influx of money from abroad is an opportunity, not a threat, for company owners, says Jonathan Binder, who helps manage $100 million in emerging-market funds at Fort Lauderdale, Florida- based INTL Consilium LLC.

``The family will benefit from cheap capital and investments, modern best-management practices, latest technology,'' Binder says. ``It is better to own a smaller part of a much bigger business with better growth prospects.''

Local Expertise

For international companies entering a country, it is often quicker and cheaper to take an established partner that can provide local expertise than to start a new unit, says Edwin Gutierrez, who helps manage $1.7 billion in emerging-market debt, including about $35 million of Colombian securities, for Deutsche Asset Management in London.

``Never overlook the importance of local knowledge when it comes to knowing the local rules and regulations and how to get around the red tape and bureaucracy,'' says Gutierrez, who isn't related to the Grupo Aval executive.

For private companies, one obstacle to taking partners or selling shares can be the emotional trauma, says Consilium's Binder.

`Give Up Their Baby'

``It's sometimes difficult for the local owners to give up their baby, especially if they are older and have run the company for a while or even more so if they founded the company,'' he says.

Julio Mario Santo Domingo, 80, who declined to be interviewed, soon got over his remorse at selling Grupo Empresarial Bavaria, says his son, Alejandro, who helped arrange the exchange of his father's 71 percent of the brewer for 15 percent of SABMiller.

``At the end of the day, my father is a very pragmatic man and saw all the benefits of the transaction,'' says Santo Domingo. ``If you ask him today, he will say he is thrilled.''

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