All around the world IR is growing, though some regions are clearly growing faster than others. Mexico is one of those regions. Last November at the Investor Relations Magazine Latin America Awards 2000, analysts and portfolio managers favored Mexican companies above all others in the region. Those companies included Cemex (awarded the Grand Prix for best overall IR in the large-cap category), Femsa (best annual report), Telmex (best communications with the retail market), and Wal-Mart de Mexico (best corporate governance). Brazilian companies also scored high points, but Mexican investor relations departments clearly established themselves as the Latin American front-runners.
Ironically, IR in Mexico is still relatively young. Ten years ago the first Mexican companies listed in the US. By the mid-1990s the average company had about the same transparency as the Mexican economy – that is, hardly any at all. National reserves had been preserved as national secrets, announced only two or three times a year. The long-standing legacies of family-owned and state-owned corporations were slow to change. Nafta (the North American Free Trade Agreement) gave the economy a shot in the arm, but much of the progress was crushed by the peso crisis of 1994-95. US investors fled back across the Rio Grande and began focusing on other markets. Everyone seemed to write off Mexico along with Argentina, Brazil and the rest of Latin America: risky investments fraught with economic and political instability.
But while the world was looking the other way, Mexico was rebuilding its momentum. Since the mid-1990s exports to the US rose from 70 to 90 percent. The peso began to stabilize along with the banking system, which underwent methodical restructurings. This overlooked nation suddenly began making bold political and economic changes, reducing tariffs, privatizing industries and opening its electoral system. In March 2000 it received the region’s first investment-grade rating from Moody’s Investor Service.
This change reached an apex at the end of last year when Vincente Fox’s National Action Party replaced the incumbent Institutional Revolutionary Party (PRI) for the first peaceful transfer of power from one party to another since 1911. (Incidentally, the last time that happened it sparked the Mexican Revolution).
All of a sudden Mexico finds itself having emerged into a new era. Mexican corporations, now armed with a decade of US listing experience, a maturing IR industry and new online personae, see themselves as having a second shot at attracting global investment.
‘I know from working in Latin America for five years that the openness of my clients’ investor relations has changed so much,’ says Maria Barona, a partner of New York-based i-Advize Corporate Communications. ‘They are open to ideas. They take pretty much every recommendation we give them – things like more information, more transparency, more exposure to management, and including certain figures in their financials.’
Barona notes how her clients have changed in just a few years: ‘They used to say, No we’re not going to give out that information – this is not the way we work. Now it’s more like, Tell me more; what can I do better? We want to be the best!’
Wearing a new sombrero
Patrick Grenham, a Latin American telecoms analyst with Salomon Smith Barney, says that over the past couple of years Mexican companies have made greater efforts to speak directly with their investors. ‘Information flows from the companies to the market on a more timely basis. And managements are making themselves more accessible to the investor base. Whereas before you could only speak to the investor relations people, now they are seen as facilitators to bring management out to speak to the markets.’
In Grenham’s view, Mexico is waking up to the notion that investment itself is important: ‘I think Mexican companies have learned over time that it’s important to keep the market informed about how their stocks are doing, because the more they do to reduce the shock that investors get, the more that becomes reflected in their stock price. They weren’t able to do that for a long time after the peso’s devaluation, and now they see that Mexico is somewhat coming back into fashion.’
These companies are using their momentum to strengthen US operations: Modelo, maker of Corona beer, is now responsible for the number-one beer import in the US (edging out Heineken); TV Azteca is becoming a contender in US Spanish-language programming; Grupo Bimbo owns Mrs Baird’s stateside bakery franchise; Femsa’s publicly traded joint venture with the Coca-Cola Company, called Coca-Cola Femsa, is the largest Coke bottler for the Mexican and Argentinean markets; and Cemex has grown to become one of the world’s largest cement makers, with operations in the US and over 30 countries.
These companies are raising the bar for corporate Mexico as well as its investor relations practices. ‘A lot of our clients say things like, What’s Philip Morris doing? Why are they so good? They’ve got to be doing something right. We can do that too,’ Barona explains. ‘Their mentality is changing from, Well, my peer over here in Mexico doesn’t release this information, so why should I have to? They’re not looking at it like that anymore. They’re looking at it like, Hey, I want to be as good as a Microsoft or a GE in investor relations; tell me what they are doing.’
Barona believes the 26 Mexican companies that are listed in the US with American Depositary Receipts (ADRs) have advantages over their Mexican peers. Several benefits result from US Gaap reporting. They report quarterly in US-dollar figures, which, she says, makes it easier for investors and analysts to value them. ADR listings also make them more visible to investors both in the US and abroad.
Barona believes the 2,000-mile border Mexico shares with the US cannot be underestimated: ‘Most Mexican companies have English-speaking IR officers. Many have American-educated IR officers and I think their proximity to the US has a strong influence. Look at the president, Vincente Fox, who worked for Coca Cola – that’s a consistent example of the US influence.’
Viva transparency!
Bill Treut, Citibank’s regional director of Latin America, reckons there are three reasons for Mexico’s improved transparency. ‘First is the benefit that years of experience bring for many of the IR directors who have been in their seats for at least a few years. They have been able to get an increasing amount of exposure to best practices of the world market.’ Indeed, the majority of Mexican blue-chip companies listed their ADRs in the early 1990s, and by now have had a great many quarters to bring their reporting methods in line with their international counterparts.
‘Second, as time has gone on many of the traditional sources of investment in the Latin markets – particularly the regional funds – have dried up. So the IR director has had to find ways to make the story more appealing to an increasingly selective investor base of largely global funds,’ Treut adds. He believes Mexican companies have been pushed by the need to find a greater breadth in their investor base, which could include global funds, medium-sized Mexican institutions and the retail investor market.
‘Another factor is that management as well as IR directors have seen that more transparency is better, and more transparency does not bring a great deal of downside to it. So the reluctance to be transparent has been melting away,’ Treut explains.
Marco Vera, head of Latin American research for Deutsche Bank Securities, adds, ‘Companies have increasingly gotten more sophisticated and more used to the demands of investors. Those that weren’t as transparent have seen the consequences in their share price and they have reacted to that.’
Regulatory shift
A boost to Mexico’s financial climate is the country’s regulatory overhaul. Mexico’s equivalent of the SEC, the Comición Nacional Bancaria y de Valores (CNBV), recently implemented new rules that are intended to modernize the country’s disclosure standards. Specifically, the new rules encourage improved corporate disclosure practices and governance structures, making board members liable to shareholders according to civil law. The net result is a higher level of reporting and accountability.
‘Regulation is moving towards increasing transparency. The CNBV regulations are now demanding a new document,’ which is similar to the 20F that US issuers file, according to Vera. ‘Mexican companies are having to translate their 20Fs, and those that have an ADR are also required to publish in Spanish.’
Whereas Mexico has long had sophisticated securities regulations in place, Pat Canary, PR Newswire’s vice president of Hispanic and Latin American markets, says they have been somewhat ineffective due to lax enforcement. She says Mexico’s stock exchange, the Bolsa Mexicana de Valores, has begun tightening its own disclosure requirements locally.
‘They are beginning now to actually act punitively against companies that are not in compliance, which is new. In the past companies got away with a lot. But in Mexico now, for example, the Bolsa is suspending trading and doing some other punitive things to companies that are not in compliance. So I think that has helped a lot.’
Canary believes the improvement of local disclosure has a cumulative effect for the country’s transparency overall. In particular, the exchange is now automated, which makes it easier for companies to comply. ‘The Bolsa is trying to improve the local transparency, and there are a lot of mom-and-pop-owned companies in Mexico that are traded on the local exchange. Traditionally they have not wanted to disclose much information. And the Bolsa has done a lot to improve the local disclosure requirements, which in turn has also led to improving their offshore disclosure.’
The long march
While Mexican companies have mostly become much more attractive to foreign investors, many say there is still a long way to go. For one, liquidity continues to be a major concern to outside investors. Floats tend to be small and in many publicly traded companies the majority of shares are owned by the original founding family or other insiders. ‘On average, from my experience with our clients, the float is about 10 percent. This is changing, albeit slowly,’ Barona explains. ‘A good example is Telmex, which is still partly state-owned. In November 2000 Telmex spun off America Movil, which has one of the largest floats in Latin America. It’s over 60 percent, which is significant for this market.’
Does Mexico’s family-owned corporate tradition limit transparency? Bill Treut believes at one time it may have, but US listings require closed companies to become more open. ‘The bigger hurdle in that respect has been convincing family owners to go through the SEC registration process,’ he says.
‘So, increasing transparency in the IR sense is not a significant leap from the transparency that companies have agreed to sign up for as part of being listed on one of the exchanges.’
This works to the advantage of larger, more established companies, but raises the bar for smaller ones. ‘In general, if you’re looking to be recognized, it’s certainly a tougher road for the medium-sized companies than it used to be. Many of the global investors are looking for certain liquidity thresholds – not to mention thresholds in terms of float – and if you don’t happen to meet that bar, it’s tougher,’ Treut admits.
It’s a catch-22 for these smaller companies. They want to increase their float and expand their shareholder base through an offering, yet the markets have most of them undervalued as yet, and they don’t want to go to market until market conditions improve. In many cases, the solution is to just sit and wait for the eventual day they go to market. Some prepare for that day by establishing a reporting system that includes US Gaap.
‘Companies are learning to meet with investors, even in bad times,’ Barona admits. ‘It has always been a problem in the past where they would feel, We have nothing to say, things aren’t going well. But companies are now saying, We want to talk to people – we’re not going to have a strong quarter, but let’s go out and meet people before this gets out of hand.’ Five years ago in Mexico this practice was unheard of.
Communicacion
Salomon Smith Barney’s Latin American telecoms analyst, Patrick Grenham, says in general Mexican companies are making a greater effort to communicate with investors. Their press releases, for example, are becoming more detailed and better defined, and they are making the risks associated with their earnings clearer. ‘If a large Mexican company were to issue results today compared to 18 months ago, they’re more detailed in how they got the results and the results are much more clearly explained,’ he believes.
Grenham also says their conference calls, which often take place in Spanish and English, now provide more detail than they did in the past. There are very few exceptions of major Mexican companies that don’t do conference calls, and now webcasting is catching on as the next step to open communications.
‘Management is slightly more accessible on an individual basis,’ Grenham adds. ‘I think it’s that the managements are much more prepared to come and speak directly to investors about the different issues that they face – both the good and the bad. It’s not that they’re just out there selling. They are explaining rather than trying to sell their stock.’
