Apr 3 2014, 6:22pm CDT | by Forbes
While the world of Wall Street is entertained by a rowdy band of activists including of Bill Ackman, Carl Icahn, and Dan Loeb, a different kind of battle has made its way to the New York courtrooms, involving Chilean billionaire Alvaro Saieh Bendeck and a DC-based hedge fund named Cartica Capital. The billionaire is accused of defrauding investors by “siphoning” special benefits from a merger deal between CorpBanca, a publicly traded bank he controls, and Brazilian powerhouse Itau, at the expense of minority shareholders.
Saieh, who is also accused of withholding information along with his board, has seen his net worth drop after the financial debacle of his retailer and supermarket chain SMU, which has been amassing losses and debt over the past few years. Cartica, a $2 billion hedge fund, claims Saieh is looking to bail out his conglomerate CorpGroup by piggy-backing off its strongest asset: CorpBanca. The billionaire, on the other hand, dismisses the suit as nonsense, claiming he won’t put a single penny of CorpBanca money into SMU. In response to Cartica, Saieh and the board of CorpBanca claim the supposed benefits are necessary to offset certain burdens of being a controlling shareholder, raising the issue of whether investor activism makes sense in markets dominated by families, billionaires, and patriarchs.
At stake is the future of Latin America’s largest bank, Itau Unibanca, and its regional aspirations across Brazil, Chile, and Colombia, the fastest growing country in the continent. CorpBanca is Chile’s fourth largest private bank with $35 billion in assets, and has been under Saieh’s control since 1995, when he picked up Banco Concepcion and went on a buying spree. Through conglomerate CorpGroup, he controls publicly traded CorpBanca, along with supermarket chain SMU, and two insurance companies. His personal net worth has fallen from $3 billion last year to below $2 billion in 2014. Also at stake is the future of activism in the region, particularly when it comes to stocks with ADRs trading in New York.
Cartica claims Saieh and the board of CorpBanca, of which he is not a member, colluded to defraud minority investors by extracting a “control premium” while claiming to be acting on behalf of all shareholders. After the rumor mill began last November, CorpBanca finally agreed to a stock-for-stock merger with Itau Unibanco in late January which would include a $653 million equity infusion, the issuing of 172 million new shares, and would render the Brazilian bank the company’s largest shareholder, with just over a third of the stock; Saieh’s CorpGroup and the remaining minority shareholders would control a little less than a third each. CorpBanca was advised by Bank of America Merrill Lynch and Goldman Sachs. The stock plunged more than 15% the day of the merger announcement.
The terms of the deal weren’t released for another six weeks, time during which Cartica began a public campaign against the merger, initially calling for a tender offer, and ultimately asking Saieh to treat all shareholders equally. Included in the deal, and finally revealed in the shareholders and transaction agreements, are a $960 million credit line to CorpGroup, the right to appoint the new bank’s chairman (Saieh’s son Jorge Saieh, current chairman, will take that role) along with several board members, certain call and put options on CorpGroup’s stake which limit downside, a guaranteed minimum dividend over the following eight years, and the cash acquisition by CorpBanca of all of the Saieh-controlled stake and of their co-investors in a Colombian bank for $894 million.
Considering they had no other option, Cartica’s management, which holds 3.22% of the stock and is one of CorpBanca’s largest minority shareholders, decided to sue in New York. “Given the special benefits received by Mr. Saieh and his affiliates, we reject the Bank’s assertion that the structure of the transaction as a share-for-share merger means that all shareholders will receive the same treatment,” explained senior managing director Teresa Barger, former head of corporate governance and capital markets at the World Bank. “To the contrary, we believe that it is patently evident that the tortured legal structure adopted by Mr. Saieh for the transaction was selected precisely to deprive minority shareholders of the opportunity to have their shares acquired in a tender offer for fair value.”
CorpBanca fired back, with CEO Fernando Massu noting “this action has no ground,” while stating that “the bank believes that the transaction is beneficial to all shareholders equally, and that the transaction, as a merger, allows all the shareholders to participate in this symmetrically.” CorpBanca denies that it has committed fraud by withholding information, noting the documents submitted by Cartica were publicly available. They dismissed any issue connected with the credit line, indicating it was necessary in order to get the transaction rolling, and said the call and put options protected the controlling shareholder, as it had a specific lockup on 50% of its stake as part of the merger agreement. The sale of the Colombian assets was tied to a previous agreement, while SMU’s financial troubles are unrelated to the matter, they argued.
With activism definitely on the rise in the U.S., and beginning to catch on in Europe, Cartica’s attempt to bring a Chilean dispute to the U.S., where CorpBanca’s ADRs trade, brings a new iteration of the strategy into play. Dan Loeb tried his hand at exporting U.S.-activism to Japan when he engaged Sony, pushing for change and attacking the company’s film and entertainment unit. Yet he was nowhere near as successful as he had been in previous campaigns on U.S. soil.
Latin American markets resemble more closely those of certain European and Asian countries than the U.S., with large concentrations of ownership around individuals or families. On the one hand, Saieh’s ownership stake implies the burden of managing the company, along with the risks of concentration, which could justify a premium on its position. On the other, management at publicly traded companies have a fiduciary duty to all shareholders, meaning they should take minority shareholders’ interest equally into account. Activism, with all its good and its bad aspects, has made its way to Latin America. It remains to be seen whether Cartica will be able to get a New York court to weigh in on the CorpBanca-Itau merger, but whatever ends up happening will leave its mark the way activism is conducted in the region.
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