Decoding Dilma’s legislative priorities

Context

With Brazil’s 54th Congress now in session, the Dilma administration will face its first legislative headache as it tackles the task of trimming excessive spending from the 2011 budget. As we have already underlined in a recent note, the government’s unruly 12-party coalition – unhappy with the political posts that have been awarded thus far – is still threatening to derail Dilma’s fiscal proposals for streamlining the budget, even though federal government spending in 2010 ballooned by 22.4 per cent year on year to more than R$700 billion (US$419.2 billion) – or about 19.1 per cent of GDP.

We believe that Dilma will ultimately reach an agreement with her allies on budget expenditures this month so that she can avoid the potential embarrassment of having her first legislative proposals overruled by Congress and move on to dealing with her front-burner issues. While Dilma has cited social issues such as the eradication of extreme poverty as her foremost goal, the five most important legislative priorities for the new government this year – which would have major implications for portfolio investors if and when this legislation advances – are:

1. Subsalt royalties

Look for an E&P auction in Q4/11

The still-contentious subsalt royalties distribution bill is the only remaining piece of the Lula government’s subsalt legislation that awaits congressional approval. If the bill is passed by Congress by Q3/11, as we expect, Brazil will be able to hold at least one E&P auction of new subsalt acreage this year.

Sources: Brazilian Congress, local press reports.

Even though the resumption of these auctions will be good news for E&P firms, the new laws are a big step backward from Brazil’s landmark and justly praised 1997 Petroleum Law. As we have pointed out previously, one red flag that has already gone up was the creation of a state-run company to administer subsalt reserves (formerly called Petrosal by the local press but now officially named Pre-Sal Petroleum SA (PPSA)). Under the new rules, PPSA has the right to appoint half the members of each operational committee for the new E&P subsalt blocks as well as its president – who in turn will have the right to veto committee decisions.

Our baseline scenario is that the Dilma government, eager for more foreign investment in this area, will remain ultimately pragmatic about the contracts for the initial blocks to be auctioned or will face investor revolt in the first E&P rounds under the new rules. Though higher commodities prices this year will embolden the government to set a higher price tag on blocks, Petrobras is acutely conscious of current Brazilian shortages in skilled labour and offshore equipment and is asking the Dilma administration to set local content at around as 35 per cent for subsalt blocks rather than up to 65 per cent set in previous auctions. Higher insurance premiums, as a natural consequence of the BP accident in the Gulf of Mexico, alongside the near-certainty of tighter local environmental regulation, are also pushing up projected costs for subsalt development.

The appointment of the PPSA president, likely to be announced only after the passage of the subsalt royalties bill, will be the next test that investors should monitor. Candidates currently being floated include Petrobras’ E&P Director Guilherme Estrella and Gas and Energy Director Maria das Gracas Foster. Although both candidates will likely defend Brazil’s national interests, they also have technical expertise and are not likely to scare off foreign investors.

2. Mining regulatory reform

Likely to stretch into 2012

In his first weeks back in office, Mines and Energy Minister Edison Lobao – who held the same post in the Lula administration – has reiterated that a top priority for the government will be the passage of a long-delayed regulatory overhaul of the country’s antiquated Mining Code of 1967. The planned legislation has been extensively discussed for the past two years but was ultimately put off by Lula owing to the priority of passing subsalt legislation.

Three bills are likely to be sent to Congress in H1/11, with the following key points (see Table 2 below):

Sources: MME, local press reports.

Some government officials have already urged an increase in mining royalties to 10 per cent, noting that Chile recently raised its mining royalties scheme from 4-5 per cent to a sliding scale of 4-9 per cent through 2014 and that Australia plans to increase its tax on iron ore and coal projects to 30 per cent of company profits starting in July 2012. However the Finance Ministry is still studying the royalty hike, and Lobao has added that this hike may be partially offset by other tax cuts so that Brazil does not unduly compromise the competitiveness of its mining sector. The Brazilian Institute of Mining (IBRAM) projects investments totalling US$64.8 billion through 2015 (see Chart 1 below).

Investors should keep a close eye on the passage of the subsalt royalties bill because we believe the Dilma administration will likely adopt a similar formula for the distribution of mining royalties (or potentially delay its launch of a mining royalties bill) – depending on a solution to this issue. Nevertheless pressure for greater royalties from Brazilian mining municipalities and states is likely to rise in the event that commodities prices spike higher. While the Brazilian Treasury collected roughly R$9.9 billion (US$5.9 billion) in petroleum royalties in 2010, it received just R$1 billion (US$600 million) in mining royalties last year, despite the fact that Brazil’s top export last year was iron ore (with export revenues totalling R$28.9 billion (US$17.3 billion), up 118 per cent year on year). Companies likely to be affected by regulatory changes include Brazil’s iron ore giant Vale (VALE:US), Brazilian billionaire Eike Batista’s MMX (MMXM3:BZ), local steel companies (Gerdau (GGBR3:BZ), Usiminas (USIM3:BZ) and CSN (CSNA3:BZ)), and mining majors Anglo-American (AAL:LN), Rio Tinto (RIO:LN) and BHP Billiton (BLT:LN).

3. Healthcare/financial transactions tax

Funding pressing social needs will create business

Healthcare ranked as the leading issue that Brazilian voters were concerned about ahead of the October elections, according to an August 2010 survey conducted by polling agency IBOPE. Long queues at emergency rooms and a shortage of beds and doctors at public hospitals in all Brazilian states are a daily occurrence in this country of 191 million people, nearly three-quarters of whom rely solely on the public Unified Health System (SUS) for care. The Dilma government has consequently pledged that top priorities for the administration will be to guarantee quality treatment for its citizens in a timely fashion, to build more hospitals and clinics, to fight dengue fever and to provide drugs for diabetes and high blood pressure free of charge.

With strong interest from newly elected state governors and the Dilma administration in taking on the healthcare issue, we expect such legislation to gain traction this year (see Table 3 below).

Sources: Brazilian Congress, local press reports.

Nevertheless reform will not come without a fight. Opposition congressmen and industry groups such as the Sao Paulo Federation of Industries have already vowed to battle any bill that reenacts a financial transactions tax, warning that the measure would affect all companies and consumers. Due to mounting political and social pressures to increase healthcare financing, however, we currently give the CSS or similar tax a 60 per cent chance of passing Congress. Other ideas that have been raised included levying a new tax on cigarettes or using funds raised from the financial operations tax (IOF). Another controversial proposal floated in November last year aims to legalize slot machines in Brazil and direct all tax revenues from the game (estimated at R$9.6-10 billion (US$5.8-6 billion if 1,500-2,000 slot machine parlours are legalized) to funding healthcare; this measure is currently opposed by Justice Minister Jose Eduardo Cardozo due to concern that the industry will foster organized crime.

Whether or not any of these proposals pass, improving the quality of the SUS will be an arduous and uphill battle for the government in the next four years. In the interim we expect companies in the sector to benefit from increased formal employment and stronger healthcare expenditure by Brazil’s rising middle classes. But as the government shines a bigger spotlight on health and tinkers with modernizing the healthcare system, risks for individual firms could also rise. For example antitrust agency CADE has already warned that it is closely monitoring market concentration in the medical services and insurance sectors. Acquisitions such as the purchase by Brazil’s largest private health insurance provider Amil of a controlling stake in one of its biggest rivals, Medial, for R$612.5 million (US$367 million) in November 2009 will likely face increased government scrutiny or have certain restrictions imposed if approved. The National Agency of Supplementary Health also indicated in late January that it is in favour of establishing a 7-day deadline for patients to meet with primary care physicians under private healthcare plans. Currently the wait for a gynaecologist or a cardiologist can extend to up to three months according to local press reports, and groups including the Sao Paulo Medical Association have warned of a “collapse” in Brazil’s private healthcare system and called changes both necessary and urgent. However, the Brazilian Institute for the Right to Supplementary Health noted this month that costs for healthcare plans may need to rise as a result.

4. Broadband/Pay TV market

Superb growth prospects but rising competition

Digital inclusion is another theme at the top of the Dilma administration’s agenda. Conscious of the importance of the Internet as an educational and business tool, Dilma has promised to expand broadband access to up to 80 per cent of the country by 2014 and to lower prices so that more Brazilians can access the service. Two legislative measures being proposed by the government to advance this goal will have direct implications for telecom giants Oi (TMAR3:BZ, TNLP4:BZ), Telefonica (TEF:SM,TLPP3:BZ, VIVO3:BZ), Embratel (EBTP3:BZ), GVT (owned by France’s Vivendi (VIV:FP) and pay TV operators Net (NETC3:BZ) and Sky as well as bright prospects for related computer, IT and e-commerce sectors (local firms include Positivo (POSI3:BZ), Totvs (TOTS3:BZ) and Ideiasnet (IDNT3:BZ).

Sources: Brazilian Congress, local press reports.

The first bill, despite criticism by broadcasters and foreign content providers such as Sky, enjoys strong support from telecom operators as well as the government, which is looking to increase competition in triple-play packages of broadband, fixed telephone lines and pay TV. Barring legislative delays on other fronts, the bill stands a good chance of passing in H1/11, and will be instrumental in pushing down consumer prices and increasing sales. The second bill is still being discussed by the Dilma administration but has already drawn sharp criticism from the private sector, which fears that the government will use Telebras to pressure operators to lower broadband prices and to expand access to less-developed cities outside the centre-south belt.

While this is undoubtedly true, there have been some encouraging signs lately of a smaller-than-feared Telebras role. Telebras’ original budget of R$1 billion (US$600 million) has been trimmed by over 40 per cent as the Dilma administration attempts to cut excessive government spending. In addition Communications Minister Paulo Bernardo acknowledged in late January that the federal government is cognizant of high taxes on broadband and is now negotiating with states to potentially exempt broadband service from state and municipal taxes in order to help keep consumer prices down. Bernardo further announced that his ministry is in discussions with the Trade Ministry to lower taxes on both domestic and imported computers, while the local industry is now pressing for federal tax exemptions (IPI, PIS/Cofins) for tablets.

Brazil sold an estimated 13.8 million computers in 2010, up 24 per cent from the year before according to IT consultancy IDC. Bernardo has forecast the sale of 16 million computers nationwide this year. If some or all of these measures are adopted, the sector and related ones should continue to have excellent growth prospects into the medium term. Pay TV sales jumped by 30.7 per cent in 2010 compared to the year before and now reaches nearly 9.8 million households nationwide according to the National Agency of Telecommunications. E-commerce sales in 2010 rose by more than 40 per cent year on year to around R$15 billion (US$9 billion) as roughly 23 million Brazilians shopped online, according to local consultancy e-bit.

5. Airport privatizations

Expect more delays

As we forecast in our December note on the World Cup, the new government has given several heartening signs that Brazil’s highly congested airport sector will be a top priority this year and that the sale of concessions for both existing and new airports is likely to accelerate. As part of the administration’s plan to improve this sector, the following important legislative measures are being discussed (see Table 5).

Sources: Brazilian Congress, local press reports.

We believe that the first bill has a good chance of being passed in 2011, particularly with the recent TAM-LAN merger (which still awaits antitrust approval). However legislative debate over the second proposal is likely to drag on into 2012-13, even though it has apparently secured the critical support of Defence Minister Nelson Jobim. Even in the best-case scenario, it is likely to take a minimum of two years for INFRAERO shares to be floated, owing to unclear legislation over the nature of INFRAERO’s assets, the lengthy process of cleaning up the company’s balance sheets, the military’s concern about public security and forceful dissent against privatization from labour unions and INFRAERO’s nearly 30,000 employees. In both cases although sector growth prospects are likely to stay in double figures, we expect domestic airlines (TAM-LAN (TAMM4:BZ), Gol (GOLL4:BZ), Azul) to be at heightened risk of fines for delays in the infrastructure buildup leading up to the 2014 World Cup, particularly during busy holiday periods.

Other innovative bills likely to be passed

Other bills will be pushed by the Dilma administration this year, but the timeline will ultimately depend on her success at reining in the government coalition, managing political alliances and moving ahead with legislative business.

Consumer credit bureau – Good news for retailers in the medium term

Although a bill creating a nationwide consumer credit bureau passed the Senate in December, Lula vetoed it in his final days in office owing to concerns about consumer privacy. Nonetheless he immediately sent a presidential decree (MP 518/2010) to Congress with a similar proposal that stipulates that Brazilian consumers can be included in the credit bureau only with their express, written consent. This bill has the support of the National Federation of Banks and local credit bureaus, which note that interest rates for consumers – at an average of 40.6 per cent per annum in December according to Banco Central data – would ultimately decline with a national credit rating system. If passed the measure will likely benefit Brazilian banks (Itau Unibanco (ITUB3:BZ), Bradesco (BBDC3:BZ), Santander Brasil (SANB3:BZ)), credit card companies (Cielo (CIEL3:BZ), Redecard (RDCD3:BZ)), homebuilders (Gafisa (GFSA3:BZ), Cyrela (CYRE3:BZ), MRV (MRVE3:BZ)) and all retailers (Pao de Acucar (CBD:US), Lojas Americanas (LAME3:BZ), Lojas Renner (LREN3:BZ), Lojas Marisa (AMAR3:BZ)) in the medium term.

Power concessions expiring around 2015 – Renewal is likely

Important electrical power concessions held by subsidiaries of federal holding company Eletrobras (ELET6:BZ) and several state utilities (notably Cia. Energetica Sao Paulo (CESP) (CESP3:BZ)) are due to expire around 2015, as we forewarned in our December 2008 note. Many of these concessions, particularly in the generation sector, cannot be renewed again under current legislation, even though they account for nearly one-fifth of Brazil’s total generation capacity. Their uncertain fate has already forced the Sao Paulo government in 2008 to delay the planned privatization of its state utility. As we underlined in our earlier note, we ultimately expect the Dilma government and Congress to approve the extension of these concessions – potentially by year-end or early 2012 – albeit with clauses that will push down consumer electricity bills. If so the measure is likely to have a favourable impact on the relevant companies. Mines and Energy Minister Lobao has promised that the government will push for a resolution this year, and we believe that action on this front is likely now that the 2010 elections are over and after an unexpected blackout on the night of 3 February hit eight northeast Brazilian states.

Changes to the Forest Code – Agribusiness producers should benefit

A much-contested bill to change Brazil’s Forest Code – which mandates the preservation of 80 per cent of the standing forest on all land in the Amazon biome and 20–35 per cent in other areas – awaits a vote by the full floor of the lower house of Congress. The bill has been slammed by environmentalists for several flaws (see Table 6 below), but it enjoys vigorous support from the agricultural lobby. If a similar version of this bill is ultimately passed, as we expect, it will likely prove positive for the country’s agribusiness producers, including soy/corn/coffee producers (SLC Agricola (SLCE3:BZ), Adecoagro (AGRO:US)), sugar/ethanol producers (Cosan (CZZ:US), Sao Martinho (SMTO3:BZ), Guarani (TERI3:BZ)), agricultural land companies (BrasilAgro (AGRO3:BZ)) and meatpackers (JBS (JBSS3:BZ, JBSAY:US), Marfrig (MRFG3:BZ, MMRTY:US), Minerva (BEEF3:BZ)). Few companies today are in full compliance with the current Forest Code, which puts their future profits (and financing lines from banks such as Banco do Brasil (BBAS3:BZ) and BNDES) at risk owing to the uncertainty of future legislation. Associations such as the Union of Sugarcane Industries have called the resolution of this uncertainty the most pressing issue for the agribusiness sector today. Speaker of the lower congressional house, Marco Maia, asserted on 2 February that voting on this bill would take place in March.

Source: Brazilian Congesss, local press reports.

Antitrust reforms – Positive for M&A dealmaking

This long-awaited bill with three goals – to speed up regulatory approval of M&A transactions, to change post-approval of operations to pre-approval and to streamline Brazil’s three antitrust agencies under CADE (nicknamed “SuperCADE” by the local press) – passed the Senate on 1 December. The bill (PL 6/2009) has now been sent back to the lower house because of changes to the original bill, and the Justice Ministry has recently indicated that passing it will be a priority in 2011. If so that would be good news for all companies engaged in M&A deals in Brazil, albeit in the medium term. As we mentioned in this recent note, even if the bill is approved, Congress must still grant CADE a sufficient budget to hire and train new employees, which could delay its implementation for 12-36 months. In the interim approval of important M&A deals such as Sadia-Perdigao (currently expected in H1/11) will continue to face delays.

Conclusion

The Dilma administration has a real chance to enact major legislative changes across key economic sectors in the next four years, if it can rein in its government coalition and take advantage of its majority in the legislature. If it does so, we would expect the continuation of three dominant themes that will inform how the new government shapes core policy in the next four years:

• Increasing local content requirements. This objective is dear to the hearts of Dilma and her inner circle of advisers and is likely to push up the “Brazil cost” for investors in diverse sectors or to restrict foreign investor participation if it is fully applied.
• Supporting local industry and regional development. The Dilma administration is highly conscious of the potential “de-industrialization” of Brazil owing to an overvalued currency and rising imports. We expect the government to announce new measures this year ranging from tax exemptions for the industrial and export sectors to higher tariffs on imports in a bid to keep local industries competitive. The less-developed north/northeast region is likely to get preferential treatment. This is welcome news for exporters, including agribusiness and auto parts companies.
• Fighting inflation. The above two themes may be undercut by the government’s third overriding concern – inflation. As Brazil’s logistical bottlenecks and skilled labour shortages continue to create inflationary pressures in the infrastructure buildup to the 2014 World Cup, the Dilma government will probably be forced to back down on some of its cherished tenets, especially as it tries to entice foreign investment into areas in which it is much needed.

Although Dilma has a clear vision of the types of reforms that Brazil needs, her greatest challenge will be managing her 12-party coalition. If she fails to keep the coalition in line, allied politicians are likely to break away and align themselves with opposition parties. Although they will be too weak to successfully challenge the government coalition, an emboldened opposition could stall legislative progress and put achievement of the administration’s priorities in jeopardy. A second risk we see from the clashing imperatives of the three above themes will be shifting rules and uneven policymaking, thus breeding more regulatory uncertainty for investors.

Relevant Companies

Airlines

Avianca (unlisted). Formerly known as OceanAir, the firm had a roughly 2.6 per cent market share in Brazil by year-end 2010. It is owned by Brazilian entrepreneur German Efromovich via his company Sinergy, which also controls one of Latin America’s largest airlines, Avianca-Taca, with hubs in Colombia and El Salvador. The firm began international flights from Brazil with a stop in Bogota in November 2010, when Avianca-Taca also joined global airline alliance Star Alliance.

Azul (unlisted). Founded in 2008 by JetBlue’s founder David Neeleman. Since starting operations in December 2008, it has grown to become Brazil’s third-largest airline, with a roughly 6 per cent market share in December 2010. The company’s principal hub of operations is Viracopos Airport in Sao Paulo.

Gol (GOLL4:BZ, GOL:US). One of Brazil’s two dominant airlines, with a roughly 40 per cent domestic market share and a 15 per cent share of international flights. The company bought troubled Brazilian airline Varig, once the country’s flagship airline, in March 2007 for US$320 million.

TAM (TAMM4:BZ, TAM:US). Brazil’s biggest airline, with a more than 40% share of the domestic market and an 85 per cent share of international flights. The firm signed an MoU in August 2010 with Chile’s LAN (LAN:CI) to merge and form Latam Airlines, in a deal that still needs to be approved by Brazilian antitrust authorities. TAM is expected to delist from the BM&FBOVESPA after approval.

Webjet (unlisted). Brazil’s fourth-largest airline, with just over 5.9 per cent of the market in December 2010 after losing market share to Azul in recent months. The firm began in 2005 and is now owned by Brazilian businessman Guilherme Paulus, the founder of Brazil’s largest tour operator, CVC. Webjet has discussed the possibility of selling a stake to Ryanair if and when the Brazilian government passes legislation allowing foreign investors to take a 49 per cent minority stake in domestic airlines.

Computer-related companies

B2W (BTOW3:BZ). Brazil’s largest e-commerce company. Formed in late 2006 with the merger of major Brazilian retailer Lojas Americanas’ e-commerce site and online retailer Submarino, though the firm's performance has not lived up to investor expectations. There has been talk in recent months that controlling shareholder, Lojas Americanas, would buy B2W’s remaining shares and delist the firm from the BM&FBOVESPA.

Ideiasnet (IDNT3:BZ). A promising Brazilian IT holding company that has invested venture capital funds in over a dozen companies in the e-commerce, IT infrastructure, telecom and media sectors. One of these firms, Padtec, won the first government auction held by Telebras in November 2010 to supply fibre optic systems for the National Broadband Plan. Brazilian billionaire Eike Batista’s Grupo EBX purchased a 7.87 per cent minority stake in Ideiasnet in mid-2008 for just over R$50 million; as of January 2011 EBX had a roughly 15 per cent stake in the firm.

Itautec (unlisted). A subsidiary of the Itausa holding group. Itautec is a key player in the Brazil PC and IT market, with one factory operating in the municipality of Jundiai in Sao Paulo state.

Positivo Informatica (POSI3:BZ). Brazil’s leading PC maker by sales, although the company has seen market share erode as sales of imports have risen. Has a strong focus on educational products. There was talk in 2008 that Lenovo was interested in buying Positivo. The local press in February 2011 reported that HP may be in negotiations to acquire the firm.

Saraiva SA Livreiros Editores (SLED3:BZ). A major Brazilian publishing house, with roughly one-third of its total revenue coming from e-commerce. The company’s e-commerce site in 2009 ranked third nationwide in sales.

Totvs (TOTS3:BZ). Latin America’s biggest maker of business-management software. The company purchased its rival Datasul (DSUL3:BZ) for about R$713 million in 2008.

Electrical energy companies

Companhia Energetica de Sao Paulo – CESP (CESP3:BZ). Controlled by the Sao Paulo state government. It has 7,456MW of installed hydroelectric capacity, of which two-thirds expires in 2015. The state of Sao Paulo has failed several times to privatize the company.

Companhia Paranaense de Energia – COPEL (CPLE3:BZ, ELP:US). Controlled by the state of Parana. COPEL has 18 hydroelectric plants with a total installed capacity of roughly 4.550MW. It has over 1,900 km of transmission lines and 3.7 million distribution clients.

Companhia Energetica de Minas Gerais – CEMIG (CMIG3:BZ, CIG:US). Controlled by the state of Minas Gerais, the firm is the largest integrated electrical energy company in Brazil, with extensive operations in generation, transmission and power distribution.

Centrais Eletricas Brasileiras – Eletrobras (ELET6:BZ). Brazil’s federally controlled electricity holding company. Key subsidiaries of the firm include Eletronorte, Eletrosul, CHESF and FURNAS.

Healthcare and related sectors

Amil Participacoes (AMIL3:BZ). Brazil’s largest health insurance provider. The company has snapped up several companies in recent years, including rival Medial for R$612 million in November 2009 (still awaiting regulatory approval).

Diagnosticos da America (DASA3:BZ). Brazil’s leading medical diagnostics firm, with operations in 12 Brazilian states as well as Brasilia.

Drogasil (DROG3:BZ). The country’s second-largest pharmacy chain.

Fleury (FLRY3:BZ). One of Brazil’s top providers of medical services and lab tests. The firm raised R$548 million in its IPO on the BM&FBOVESPA at year-end 2009, and agreed in December 2010 to buy rival Labs D’Or for R$1 billion. It has operations in the states of Sao Paulo, Rio de Janeiro, Parana, Rio Grande do Sul, Pernambuco and Bahia.

Odontoprev (ODPV3:BZ). Brazil’s top provider of dental care plans.

Raia (RAIA3:BZ). One of Brazil’s key retail pharmacy chains, with operations concentrated in the country’s centre-south region. The firm raised R$655 million in its IPO on the BM&FBOPVESA in December 2010.

Mining and steel companies

Acos Villares (AVIL3:BZ). Part of the Sidenor Group. It has three plants, all of which are located in the state of Sao Paulo. The firm focuses on the production of special bar quality steels for the automotive industry.

ArcelorMittal (MT:US). Produces long carbon steel and flat carbon steel. It is comprised of three companies: ArcelorMittal Belgo, ArcelorMittal Tubarao and ArcelorMittal Vega. Brazil accounts for 11 per cent of the company’s global turnover.

Companhia Siderurgica Nacional (CSN) (CSNA3:BZ, SID:US). Brazil’s first integrated flat steel producer. The company’s assets consist of an integrated steel mill, five industrial units and an iron ore mine.

Gerdau (GGBR3:BZ, GGB:US). The largest producer of long steel in the Americas, with mills in Brazil, Argentina, Canada, Chile, Colombia, Venezuela, Mexico, the Dominican Republic, Peru, the US and Uruguay.

MMX Mineracao e Metalicos (MMXM3:BZ, MMXMY:US). Brazilian billionaire Eike Batista’s mining company. Mining major Anglo-American bought controlling stakes in MMX’s Minas-Rio iron ore project and the Amapa iron ore system in a R$5.4 billion deal in 2008.

ThyssenKrupp (TKA:GR). Controlling shareholder of the ThyssenKrupp CSA Siderurgica do Atlantico plant in Rio de Janeiro (a JV with Vale). The plant has an installed capacity of 5 million tonnes of slab steel, and began production on 7 September 2010.

Usinas Siderurgicas de Minas Gerais (Usiminas) (USIM3:BZ, USNZY:US). Brazil’s second-largest steel producer, with an installed capacity of 9.5 million tonnes/year. Controls Sao Paulo-based steel mill COSIPA.

Vale (VALE3:BZ, VALE:US). The world’s largest iron ore producer and Brazil’s largest rail transporter in terms of volume. The company has embarked on an ambitious shipbuilding programme in recent years and has also unveiled a massive investment plan to step up fertilizer production.

Oil and gas – local E&P companies

HRT Participacoes em Petroleo (HRTP3:BZ). A Brazilian oil and gas startup with a 55% stake in 21 exploratory blocks in the Solimoes Basin of Brazil’s Amazonas state as well as five exploratory blocks off the coast of Namibia. The firm raised R$2.6 billion in an IPO on the BM&FBOVESPA in October 2010.

Petroleo Brasileiro – Petrobras (PETR3:BZ, PBR:US). Brazil’s state-run oil behemoth. Under new subsalt legislation, Petrobras will be granted the right of sole operatorship in all new blocks to be auctioned off, with a minimum 30% stake.

OGX Petroleo e Gas Participacoes (OGXP3:BZ, OGXPY:US). Brazilian billionaire Eike Batista’s oil and gas startup. The firm raised R$6.7 billion in 2007 in Brazil’s then-largest IPO. It is expected to start production from several E&P blocks this year.

Queiroz Galvao E&P (QGEP3:BZ). The oil E&P unit of Brazilian civil construction giant Queiroz Galvao. The firm raised R$1.5 billion in an IPO on the BM&FBOVESPA in February 2011.

Oil and gas – related sectors

Confab Industrial (CNFB4:BZ). The local subsidiary of Tenaris, the world’s largest producer of seamless steel tubes used in the oil industry.

Mills Estruturas e Servicos de Engenharia (MILS3:BZ). Provides scaffolding and other structures for Brazil's oil, shipbuilding and construction industries. The firm raised R$685.7 million in its IPO on the BM&FBOVESPA in April 2010.

OSX Brasil (OSXB3:BZ). Brazilian billionaire Eike Batista’s shipbuilding startup.

Lupatech (LUPA3:BZ, LUPAY:US). A top Brazilian provider of oil production equipment and services.

Wilson Sons (WSON11:BZ, WSON:LX). An integrated maritime and logistics company with a shipyard in Guaruja (Sao Paulo) and another under construction in Rio Grande do Sul state to service Brazil’s growing offshore oil and gas sector.

Pay TV/Broadband

Net Servicos de Comunicacao (NETC3:BZ). Market leader in pay television in Brazil. A JV between local media conglomerate Organizacoes Globo and Mexico’s Telmex.

Sky Brasil (unlisted). The leading satellite television provider in Brazil and Brazil’s second-largest pay TV operator. The firm was created from the merger of Directv and Sky. Shareholders include News Corp and local media conglomerate Organizacoes Globo.

Tevecap (TVA). Brazil’s second-largest cable television company, a JV between media group Abril and Spain's Telefonica. It also offers broadband, using the brand name Ajato. Abril is reportedly interested in selling its stake in TVA to Telefonica when pay TV legislation changes to allow foreign firms to take a controlling stake in cable companies.

Telecom

Claro (unlisted). Brazil’s second-largest mobile phone company. Owned by Mexican billionaire Carlos Slim’s wireless operator America Movil (AMOV:US, AMXA:MM).

Embratel (EBTP3:BZ). Brazilian fixed-line phone carrier owned by Carlos Slim’s wireless operator America Movil. The firm is the country’s third-largest pay TV operator and also owns a majority of total capital (but not a controlling stake) in pay TV operator Net. Embratel is expected to purchase the remaining shares of Net if and when Brazilian legislation changes and allows foreign companies a controlling stake in cable TV firms.

GVT (unlisted). Brazilian fixed-line telephone group headquartered in southern Parana state. France’s Vivendi (VIV:FP) outbid Spain’s Telefonica in November 2009 and purchased a controlling stake in GVT in a deal that valued the company at R$7.2 billion.

Nextel (unlisted). A unit of the US-based Latin American wireless carrier NII Holdings (NIHD:US). Nextel paid R$1.4 billion in a December 2010 government auction for 3G spectrum in Sao Paulo, Rio de Janeiro and Brasilia. The company plans to spend R$4.5-5.5 billion in the next five years in order to implement nationwide coverage.

Oi (TMAR3:BZ, TNLP3:BZ). Brazil’s largest landline company and fourth-largest wireless carrier. Oi (formerly called Telemar) announced in 2008 that it would merge with Brazil’s third-largest fixed-line firm Brasil Telecom. The transaction was finally approved by antitrust authorities in October 2010. Portugal Telecom agreed to buy a 22 per cent stake in Oi for R$8.3 billion in January 2011.

Telecomunicacoes Brasileiras – Telebras (TELB4:BZ). Brazil’s federal telecom holding company. Made nearly defunct after the privatization sales in the telecom sector in the 1990s, Telebras was revived in H1/10 by the Lula administration and put in charge of executing the country’s National Broadband Plan, now due to be sent to Congress in H1/11.

Telefonica (TEF:SM). Spain’s telecom and broadband giant. Owns Sao Paulo fixed-line carrier TELESP (TLPP3:BZ) as well as Brazil’s top mobile operator Vivo (VIVO3:BZ). TELESP and Vivo are currently being merged in an operation that is expected to conclude in H1/11.

Telecomunicacoes de Sao Paulo – TELESP (TLPP3:BZ). Brazilian fixed-line phone unit owned by Spain’s telecom giant Telefonica.

Tim Participacoes (TCSL3:BZ). Brazil’s third-largest wireless carrier. Owned by Italy’s biggest phone company, Telecom Italia.

Vivo Participacoes (VIVO3:BZ, VIV:US). Brazil’s leading wireless carrier. The firm is owned by Spain’s Telefonica, after Portugal Telecom agreed to sell its 50 per cent stake for 7.5 billion euros in July 2010. Telefonica has said that the ongoing merger of Vivo and its fixed-line carrier TELESP could result in between 3.3 and 4.2 billion euros in synergies.