Banco do Brasil Loses in Itau-Unibanco Deal on Pressure to Buy

By Fabio Alves
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Nov. 4 (Bloomberg) -- Banco do Brasil SA was left out of a rally in Brazilian banks on concern the merger of the country's second- and third-largest lenders will force it to pay more for its own acquisitions.

Every company in the MSCI Brazil Financials Index rose except Banco do Brasil yesterday after Banco Itau Holding Financeira SA agreed to acquire Uniao de Bancos Brasileiros SA for stock. The deal creates a lender with 575 billion reais ($261.4 billion) in assets, overtaking the federally controlled Banco do Brasil as Latin America's biggest financial institution.

Banco do Brasil lost 3.1 percent to 14.32 reais in Sao Paulo trading, extending its decline this year to 53 percent, compared with a 40 percent retreat in the Bovespa Index. Itau surged 16 percent and Unibanco climbed 9 percent. The bank index added 5.8 percent.

``Investors worry that Banco do Brasil will now make a deal in response to the Itau and Unibanco merger and I'm not sure that there's anything out there that's very attractive,'` said Greg Lesko, who helps oversee $900 million at Deltec Asset Management Corp. in New York. ``There's concern that Banco do Brasil may overpay in order to compete.''

Analysts said the Unibanco acquisition may signal more consolidation ahead among Brazilian banks after local credit markets dried up. Nossa Caixa SA, the Sao Paulo state-controlled company in talks to be acquired by Banco do Brasil, climbed 8.8 percent to the highest level in a month after the acquisition.

Acquisition Candidates

Nossa Caixa is among several state-controlled banks such as Banco do Estado do Piaui SA and Banco de Brasilia in talks with Banco do Brasil. Banco do Brasil is also holding talks to buy Banco Votorantim SA for an undisclosed sum, Exame magazine reported without saying where it obtained the information. A spokesperson for Banco Votorantim said the bank ``isn't for sale and the negotiation talks are a rumor.''

Talks between Itau and Unibanco accelerated as the global credit crisis deepened, Itau Chief Executive Roberto Egydio Setubal said at a press conference in Sao Paulo. Itau posted a 26 percent decline in third-quarter profit, while Unibanco's net income plunged 41 percent.

Banco do Brasil may report an 8.8 percent drop in third- quarter profit on Oct. 13, according to the average estimate by three analysts surveyed by Bloomberg. Yesterday's decline follows Banco do Brasil's worst monthly performance since at least January 1995 as the stock plummeted 35 percent in October.

The sell-off increased after President Luiz Inacio Lula da Silva on Oct. 22 signed a decree authorizing federally controlled banks to buy stakes in financial firms as part of an effort to boost liquidity and revive lending.

No Patience

``In times like this, investors don't have patience for any uncertainty at all and there's a risk, with the decree, that the government would use Banco do Brasil to further policy ends,'' said Urban Larson, Latin America portfolio manager at F&C Management Ltd. in London, which oversees about $2.5 billion in stocks.

Banco do Brasil, which has 403 billion reais in assets, paid 685 million reais to buy state-controlled Banco do Estado de Santa Catarina SA last month, the first of at least four acquisitions by the government to challenge faster-growing private competitors.

``It's possible that the acquisitions that would take place as a result of the decree may be positive, as we don't have a concrete example to make an assessment,'' said Luiz Fernando Figueiredo, head of the association of capital markets investors and founder of Maua Investimentos Ltda., which oversees $350 million in stocks and bonds.

To contact the reporter on this story: Fabio Alves in New York at falves3@bloomberg.net