March 9, 2011 / 5:35 PM / 9 years ago

New South American exchange may give Mexico a jolt

* Bogota, Lima, Santiago stock exchanges to integrate

* New MILA exchange to vie for No. 2 spot in Latin America

* Proponents say MILA to spur IPOs, boost regional growth

By Herbert Lash

NEW YORK, March 9 (Reuters) - Plans to integrate stock exchanges in Chile, Colombia and Peru have caught the eye of foreign investors and could give Mexican companies a run for their money as the combined market will be bigger — and perhaps more compelling — than the bolsa in Mexico City.

Linking the exchanges in Bogota, Lima and Santiago will allow the enlarged market to leapfrog the Mexican bourse to become the second-largest in size in Latin America after Brazil’s when ranked by market capitalization of its listed companies.

At the end of December the three South American exchanges had a combined market cap of $718.8 billion, compared to the Mexican stock market’s $453.5 billion.

The depth of the future Mercado Integrado Latinoamericano, or MILA as the market is called by its Spanish acronym, makes it more attractive as an investment destination than Mexico, said Stacy Steimel, in charge of Latin American equities at PineBridge Investments, which oversees $85 billion in assets.

“What is more important than the market capitalization being larger than Mexico, which it will be, is the fact that the companies are not oligopolies,” Steimel said. “These are three very vibrant markets, which foster free competition and have better corporate governance than Mexico.”

The Mexican stock exchange touts such companies as America Movil, the mobile telephone company controlled by Carlos Slim, broadcaster Grupo Televisa and brewer Grupo Modelo. While these companies have great brand recognition, they are considered oligopolies, where a small number of companies control their respective industries.

The three exchanges have been conducting tests since last year that are slated to conclude at the end of March, when officials are expected to announce a start-up date for MILA.

‘LIQUIDITY IS EVERYTHING’

The combined size of MILA is no small matter for investors who often face a lack of shares to buy or sell when dealing in the local exchanges. They see the combined exchange as a driver of regional growth and initial public offerings, while providing needed liquidity to attract their investments.

For example, Equity International, the international arm of billionaire real estate mogul Sam Zell, was an investor in Chilean shopping center operator Parque Arauco SA PAR.SN.

Equity International chief executive Gary Garrabrant called Parque Arauco a “terrific” company, but quality alone is not enough to ensure large-scale foreign investment, he said.

“At the end of the day, a lot of growth is propelled by investment coming from international sources that will seek liquidity,” said Garrabrant, who says his private equity firm is the largest real estate investor in Latin America.

“When Chile, Peru, Colombia join forces, what they’re basically saying is our system — comprehensive, coordinated — is attractive to the largest global investors in liquidity terms. And that liquidity is everything,” he said.

Parque Arauco’s market cap is $1.2 billion, though the amount of shares available for trade — its free float — is only $680 million. MILA will have 12 companies with market caps of $10 billion or more, two more than the Mexican exchange.

Latin America makes up just 1 percent of global equity transactions, and Brazil accounts for four-fifths of that, World Economic Forum data shows, according to the Colombian stock market. Still, the Mexican exchange will remain second in transaction volume after Brazil in Latin America.

BIAS TO LOCAL EXCHANGES DISSIPATES

Garrabrant pays close attention to institutional investors because he has tapped stock markets for capital and then used them as exit strategies for his investments. He was behind the U.S. listings of homebuilders Desarrolladora Homex SAB (HOMEX.MX) in Mexico and Brazil’s Gafisa SA (GFSA3.SA) and he is in serious talks with several potential partners in Colombia that could be candidates to access capital through MILA.

Garrabrant once doubted U.S. investors would be willing to invest through local exchanges because of governance, financial reporting, accounting, and reputation concerns. But he has learned that they will invest locally, just as he has.

“That’s something that we would not have predicted,” he said. “We’ve become more sophisticated and now appreciate there is a place for more regional exchanges.”

MILA should lower exchange costs, increase analyst coverage and boost access to small public companies and new products, said Steimel, who is based in Santiago. “Part of the beauty of this integration is that there is very little downside,”

In preparation for MILA, the Bogota and Lima exchanges are merging, a deal that will allow Peruvians to enter Colombia’s fixed-income market and Colombian expertise in fixed-income, derivatives and currency instruments to spread to Peru.

Many companies are waiting to go public, which should herald greater growth in the region, just as Brazil’s IPO boom several years ago made investors take notice.

“These countries are growth engines, particularly Colombia and Peru,” Garrabrant said. “I would liken Colombia to Brazil 10 years ago, and it’s very exciting to be there at the ground floor.” (Reporting by Herbert Lash; Editing by Andrew Hay)

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