USA Inbound Acquisitions & Investments Blog : Inbound Investment Lawyer & Attorney : Sullivan & Worcester Law Firm : Mergers & Acquisitions, Cross Border Investments

Although multinational enterprises (MNEs) from developed economies are likely to provide substantial outbound foreign direct investment to the United States by way of M&A transactions, buyers from other nations are gaining presence. The role of Russian MNEs and investors as buyers may be increasing. 

A publication earlier this month by the Vale Columbia Center quantifies the importance of Russia as a source of outbound foreign direct investment (OFDI) for the United States and other developed nations. Professor Andrei Panibratov, Associate Professor of the Graduate School of Management of Saint Petersburg State University, and Kalman Kalotay, Economic Affairs Officer at UNCTAD in Geneva, Switzerland, authored the profile to highlight the increasing importance of Russia’s FDI program. The profile demonstrates that Russian direct investors are continuing to penetrate foreign markets and undergo a process of internationalization. The authors suggest that a carefully considered policy from Russia’s government would significantly enhance the benefits to Russia from its OFDI.  

According to the publication, various motives drive Russian OFDI: 

• The desire of managers and owners to control or offset Russia’s political and economic risks 
• Expected profitability of the investments themselves
• Expectations for better global recognition

Although Russia’s OFDI fell by 15% in the first quarter of 2009, compared with the first quarter of 2009, at the end of 2008 Russia held the second largest stock of foreign direct investments among the emerging economies, aggregating US $203 billion. This stock exceeds the investments held by Brazilian, Chinese and Indian multinationals. Between 1995 and 2007, Russia’s offshore investments grew more rapidly than did the investments of Brazil, China and India. Mergers and acquisitions by Russia’s multinationals from January 2005 through June 2008 were over ten times the volume during the 2001 through 2004 period. There are 50 to 60 Russian multinationals that account for a significant part of offshore acquisitions. The total number of Russian MNEs investing offshore exceeds 1,000, the authors believe. 

Among the 2009 inbound U.S. transactions was the purchase by Trubnaya Metallurgicheskaya Kompaniya OAO (TNK) of a 49% interest in Kentucky-based NS Group Inc. for an undisclosed amount. NS Group is a manufacturer of tubular goods.

It’s worth noting that the 2007 acquisition of publicly-owned Oregon Steel Mills by Evraz Group SA, a Luxembourg company with Russian affiliation, cleared the Committee on Foreign Investment in the United States (CFIUS) without much apparent problem, unlike transactions originating in other emerging market economies. Most of these business operate in the oil and gas, metallurgy, finance and communications industries. 

All of which suggests that Russia may provide fertile soil for inbound deals. 

The report is the first in a series of Columbia FDI Profiles that the Vale Columbia Center on Sustainable International Investment has recently launched. Material in this post is reprinted with permission from the Center (www.vcc.columbia.edu). 

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 While there has been and currently is considerable focus on inbound mergers and acquisitions originating from China and other Asia-Pacific countries, Brazil’s multinational businesses are also showing strong interest in U.S. targets.

  Earlier this month there were several reports that JBS SA of Sao Paulo was on the verge of purchasing financially troubled Pilgrim’s Pride of Pittsburg, Texas for approximately $2.5 billion. If completed, the deal would create the second largest chicken producer in the U.S. According to another report, in July, a U.S. unit of JBS filed to list its shares on the New York Stock Exchange. CNNMoney.com makes the case that JBS has a strong track record for U.S. purchases. In 2008, JBS acquired the beef operations of Smithfield Foods for $565 million. In 2007, JBS bought Swift & Co. of Greeley, Colorado for approximately $225 million. 

The Deal’s blog also pointed out that a highly-effective Brazilian-dominated management team led InBev’s $52 billion merger with Anheuser-Busch Cos. 

JBS’ planned and completed acquisitions and the accomplishments of InBev’s executives can be viewed in the context of the recent significant growth in Brazil’s direct investment abroad. According to an August 2009 publication of the Vale Columbia Center on Sustainable International Investment, authored by Luís Afonso Lima and Octavio de Barros, Brazil’s outbound foreign direct investment (OFDI) has surged. Although 2009 is likely to show substantially less OFDI than 2008, growth is likely to resume in 2010. If Brazil is able to overcome certain obstacles to OFDI, its investment should permit it to grow at even faster rates.

Vale’s publication reports that from 2000 to 2003, Brazilian OFDI averaged $0.7 billion each year. That annual average increased to $14 billion for 2004 through 2008. In 2008, Brazil’s outbound investments reached nearly $21 billion. In the first five months of 2009, however, Brazil’s OFDI was reduced by almost 90% from the comparable period in 2008. Vale’s publication predicts that Brazilian OFDI would hit the $4 billion level for all of 2009. If completed, JBS’ acquisition of Pilgrim’s Pride would account for over 60% of that amount.

According to the publication, Brazilian enterprises, whether private or governmentally sponsored, are seeking to make outbound investments, motivated by their desire to:

• follow clients into international markets
• defend competitive positions
• monitor competition in international markets
• meet international demand
• reduce dependence on Brazil’s domestic market
• find lower costs, better infrastructure and more attractive fiscal incentives

In the case of JBS, the likely reason behind its US initiative is to continue to build its meat products platform in the world’s largest developed consumer market, as well.

There are factors that may impede growth in outbound investment from Brazil. The Vale publication cites three principal impediments that must be overcome if Brazilian OFDI is to fulfill its promise:

• the Brazilian Development Bank and domestic Brazilian banks must provide investment and acquisition financing to support OFDI initiatives 
• more personnel with skills and knowledge about offshore markets must become available
• the Brazilian government must enter into additional double taxation treaties to relieve the inordinately high tax burden on Brazilian multinationals

The Vale publication is by Luís Afonso Lima and Octavio de Barros, and is entitled “The growth of Brazil’s direct investment abroad and the challenges it faces,” Columbia FDI Perspectives, No. 13, August 17, 2009. The information relating to the report has been reprinted with permission from the Vale Columbia Center on Sustainable International Investment (www.vcc.columbia.edu).

Updated: On September 15 Pilgrim’s Pride confirmed that JBS SA will buy a majority stake in the company in a deal that values the company at $2.8 billion. Pilgrim’s Pride has agreed to sell 64 percent of stock in the reorganized company to JBS for $800 million in cash. Existing shareholders will receive shares totaling 36 percent of the company. It is not yet clear whether the parties will file a notice with CFIUS for regulatory clearance.  At the same time JBS will acquire control of  Bertin SA, one of Latin America’s largest producers and exporters of milk products, beef and leather.

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A comment to this blog received last month questioned whether regulatory screening of inbound mergers and acquisitions by the United States conflicts with U.S. bilateral investment treaties (BITs).

BITs generally promise that the host country will treat all inbound investors equally with investors from the host country. The rationale is clear -- based on the treaty provisions FDI will flow into the host country and will be protected. BITs promise investors fair and equitable treatment for their investments, equal treatment with the host’s own nationals and “most favored nation” treatment, as well as a guarantee of full compensation should appropriation occur. BITs also establish an agreed-on tribunal for resolving disputes under the treaty.

The objective of BITs is to generate FDI. The general model of BIT currently used by the U.S. extends equal treatment with U.S. investors not only to businesses once established but also to the period prior to the actual creation of the investment, that is, while there is an agreement to acquire or invest. On the other hand, the purpose of a regulatory screening regime, such as the Committee on Foreign Investment in the United States (CFIUS), is to filter inbound mergers and investments so that foreign ownership does not impair the ability of the U.S. to defend itself. The policy is rooted in national security, not economic security or the protection of U.S.-based businesses against external competition. CFIUS implements its policy during the pre-investment phase.

The resolution to this apparent conflict between policies and the answer to our commenter’s question is found in the BIT itself. The current U.S. model form has the following provision, entitled “Essential Security,” that describes certain “Non-Precluded Measures” that the treaty permits the U.S. or the other treaty party to take:

Nothing in this Treaty shall be construed . . . to preclude a Party from applying measures that it considers necessary for the fulfillment of its obligations with respect to the maintenance or restoration of international peace or security, or the protection of its own essential security interests.

In laymen’s terms, as long as the CFIUS review is undertaken to protect essential security interests, it trumps the BIT’s provisions.

A few interesting facts about BITs, all extracted from a comprehensive and detailed overview of the topic authored by Lisa E. Sachs and Karl P. Sauvant of the Vale Columbia Center on Sustainable International Investment:

• the number of BITs worldwide have literally exploded over the past half century from one in 1959 to 2,573 in 2006, with more than 2,000 of these having been signed since 1989
• by the end of 2006, 177 countries had entered into one or more BITs
•  the economies with the most BITs are Germany (135), China (119) and Switzerland (114)
• the U.S. is not listed among the 10 countries who are parties to the greatest number of BITs, although it is the country that has entered into the greatest number (148) of double taxation treaties

The Sachs/Sauvant overview is essential and interesting reading for anyone seeking an informed perspective on the interplay BITs and FDI.

Thanks to my partner Jim Silkenat for his assistance in preparing this post.

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