Equities Research

Getting to Know Brazil Brazil

Equity Strategy
Strategy Comment

23 November 2009

#1 – The poison pill myth

Carlos Sequeira, CFA
Do poison pills imply high standards of corporate governance? Analyst
Brazil’s highest level of corporate governance, which requires companies to have carlos.sequeira@btgpactual.com
only voting shares, with 100% tag-along rights for minorities, is known as the +55 21 3262 9223
Novo Mercado. Out of the +100 stocks listed in this group, the bylaws of more Antonio Junqueira
than 50% of them contain rules aiming to prevent a hostile takeover. The so- Analyst
called “poison pills” require companies buying a specific number of shares in antonio.junqueira@btgpactual.com
another company to make a tender offer (at a significant premium to market +55 21 3262 9278
prices) for 100% of the issuer’s capital.

Poison pills (i) may not be valid in M&As, (ii) can be removed…
Some investors may think that the implied premium demanded by poison pills
represents a potential benefit for shareholders. What many don’t know is that
these anti-takeover rules, in many cases, can be easily removed. In other cases,
poison pills are not even valid in the event of a transaction involving the
company’s controller. Finally, we have recently seen cases in which poison pills
(although valid) were not applied, due to the structure used in the M&A
transaction.

… or (iii) can simply block transactions

If not overruled, poison pills may simply block minority holders from increasing
their stake in companies or prevent any M&A deal from happening.

Poison pills don’t increase a stock’s value

We don’t believe poison pills protect minority shareholders’ investment value. If
the fundamentals don’t justify a premium price, all else equal, the transactions, as
a general rule, simply don’t go ahead. If that’s the case, instead of protecting
shareholders by increasing the potential upside of stocks, poison pills may be
reason for a discount.

ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 6

BTG Pactual does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
 Getting to Know Brazil page 2
23 November 2009

Healthy or poisoned?
Back in the 1980s, when stocks and the after-tax cost of debt were cheap, the
US market enjoyed a boom in hostile leveraged buyouts. The math was simple.
If the after-tax cost of debt was lower than the company’s earnings yield and the
business was a stable cash flow generator, it was value-accretive to buy the
company.

With a stockholder base much more disperse than the current Brazilian reality,
the LBO boom has changed the face of corporate America, and the trend has
posed a threat to many managers’ jobs. The reaction of executives was to
defend, on the political front, changes to local regulations and, on the corporate
front, changes to the companies’ bylaws.

A relevant “agency problem” was created, putting managers and shareholders

on opposite sides. The anti-takeover clauses inserted into companies’ bylaws
helped contain the huge LBO activity, maintaining the status quo for longer. The
clauses and the passive stance of shareholders extended the mandates of
inefficient managers across the industry, harming operating efficiency and
returns.

Poison Pills in Brazil

The recent capital market boom in Brazil significantly altered the controlling
status of many companies. Brazil, which was previously a country with mostly
family-controlled companies, started to see stronger shareholder base
dispersion. Corporations are still a rare exception, but most of the top 100
companies are now public.

During the IPO season, many of the controllers of the companies that went
public decided to protect themselves from hostile takeovers (even in cases
where they are not yet possible – i.e., when over 50% of the shares are held by
one single shareholder).

Labeled as a ‘capital dispersion protection’ clause, the poison pills were

introduced into company’s bylaws, mainly with the aim of preventing minorities
from surpassing a specific amount of shares. Today, at the Novo Mercado, this
amount ranges from 10% to 35% of the total capital.

Out of the +100 stocks listed in this group, more than 50% contain poison pills in
their bylaws. Considering the list available on the Bovespa’s website and making
some adjustments, 52 Novo Mercado stocks contain a poison pill clause (see
Appendix for a complete list of Novo Mercado companies with poison pill
clauses).

Of these 52 poison pill clauses, 25 can be removed by a simple majority if

approved by a General Shareholders Meeting, like BMF Bovespa, B2W, JBS
and Redecard. This is, in our view, the ideal structure, since shareholders are
able to vote new rules if conditions change. Cremer has just removed its capital
dispersion protection clause, while GVT has suspended it temporarily.
 Getting to Know Brazil page 3
23 November 2009

At the remaining 27 companies, removing the poison pill clause may appear very
difficult. Amil and Hering, two of the 27, allow the clause to be removed via a
General Shareholders Meeting. However, these companies require a
supermajority, which makes things more complicated.

Some clauses are so difficult to be removed that CVM has opposed them

In 25 cases, although the poison pill can be removed, the bylaws contain a
paragraph stating that those voting to remove the clause shall buy the shares of
those voting against (in most cases, at the same premium price defined by the
poison pill). This is the case of DASA, Lojas Renner and Positivo, for example.

However, the CVM (Brazilian SEC) has positioned itself against this article,
stating (via Legal Opinion #36) that the demand on those voting to remove the
poison pill opposes specific articles (115, 121, 122, 129) of Brazilian Corporate
Law – the key law governing public companies in the country. The CVM’s
orientation hasn’t yet been analyzed from a legal standpoint, but we think that
the courts would most likely follow the capital markets regulator, which has more
knowledge in such matters. If that is the case, then even these bylaws could be
altered in order to remove the poison pill clauses.

M&As

Other issues tone down the importance of poison pills. Sometimes, anti-takeover
clauses are not applicable when the controller sells its shares. In these cases,
the anti-takeover measure is truly treated as a defense against capital
concentration. As the controllers’ shares are not considered float, sometimes
M&As are able to bypass the poison pill premium. In other cases, a complex
structure, involving a new holding company, is able to avoid the poison pill.

Poison pills don’t increase (and may even reduce) stocks’ value

We don’t think poison pills add corporate governance value to companies. The
fact that the bylaws of 50% of all Novo Mercado listed stocks feature such
measures is not, in our view, a reason to believe the opposite.

As we believe fundamentals are the main reason behind any relevant

investment, if the prices forced by poison pills are not removed, the clauses tend
simply to block M&A transactions and minority shareholders from buying more
than a specific stake in a company. The low caps imposed by these clauses
may, at the end of the day, reduce demand for the stocks. If that’s the case,
instead of protecting shareholders by increasing the potential upside of the
investment, poison pills may be reason for a discount.
 Getting to Know Brazil page 4
23 November 2009

Appendix
Table 1: Details of anti-takeover clauses (poison pills) – Novo Mercado

Company Poison Pill existence Triggered at Voting for removal implies any obbligation?
Açúcar Guarani no
Agra yes 20% yes (tender - Art 39 par 11)
American Banknote yes 20% yes (tender - Art 43 par 14)
Amil yes 15% no, but requires 75% quorum to remove the poison pill
B2W yes 20% no
Banco do Brasil no
Bematech yes 25% no
BMF Bovespa yes 15% no
BR Malls no
Brasil Agro yes 20% yes (tender - Art 45 par 11)
Brasil Brokers yes 20% no
Brasil Ecodiesel yes 30% yes (tender - Art 39 par 10)
Brasil Foods yes 20% yes (tender - Art 37 par 13)
Brookfield no
CCDI no
CCR no
Hering yes 20% no, but requires 2/3 approval of total shareholders
Providencia no
Sabesp no
Copasa no
Visanet no
Cosan no
CPFL Energia no
CR2 no
Cremer removed
CSU Cardsystem no
Cyrela no
CCP yes 15% yes (tender - Art 50 par 10)
Dasa yes 15% yes (tender Art 41 par 8)
Drogasil no
Duratex no
Energias do Brasil no
Embraer yes 35% no
Equatorial no
Estácio no
Eternit no
Even no
Eztec yes 15% yes (tender Art 41 par 10)
Fertilizantes Heringer yes 20% yes (tender Art 41 par 11)
Gafisa no
General Shopping yes 15% yes (tender Art 43 par 10)
GVT removed
Helbor yes 20% yes (tender Art 45 par 11)
Hypermarcas no
Ideiasnet yes 25% no
Iguatemi no
Romi yes 15% yes (tender Art 51 par 8)
Inpar yes 20% yes (tender Art 38 par 11)
Invest Tur yes 35% no

Source: Companies’ bylaws and BTG Pactual. Novo Mercado list as of October 14th 2009 (Bovespa website). Abyara, Nossa Caixa, Klabin Segall and Tenda removed from the original list.
 Getting to Know Brazil page 5
23 November 2009

Table 2: Details of anti-takeover clauses (poison pills) – Novo Mercado (continuation)

Company Poison Pill existence Triggered at Voting for removal implies any obbligation?
Iochpe Maxion yes 15% yes (tender Art 48 par 11)
JBS yes 20% no
JHSF yes 15% no
Light no
LLX no
Localiza yes 10% no
Log-in yes 35% yes (tender Art 35 par 12)
Lojas Renner yes 20% yes (tender Art 43 par 11)
Lopes yes 20% yes (tender Art 35 par 12)
Lupatech yes 20% no
M. Dias Branco yes 10% no
Magnesita no
Marfrig no
Marisa yes 15% no
Medial yes 20% no
Metalfrio no
Minerva yes 20% no
MMX no
MPX no
MRV no
Natura yes 25% no
OHL Brasil yes 20% no
Odontoprev yes 15% yes (tender Art 39 par 8)
OGX no
PDG no
Porto Seguro no
Portobello yes 30% no
Positivo Informática yes 10% yes (tender Art 32 par 15)
Profarma yes 20% yes (tender Art 41 par 11)
Redecard yes 26% no
Renar Maçãs no
Le Lis Blanc no
Rodobens yes 15% yes (tender Art 43 par 10)
Rossi no
São Carlos yes 25% no
São Martinho yes 10% no
SLC Agrícola yes 20% no
Springs yes 20% no
Tarpon no
Tecnisa yes 20% yes (tender Art 38 par 14)
Tegma no
Tempo yes 20% no
Tivit no
Totvs yes 20% yes (tender Art 44 par 14)
Triunfo yes 20% yes (tender Art 32 par 8)
Tractebel no
Trisul yes 15% yes (tender Art 45 par 8)
Weg no

Source: Companies’ bylaws and BTG Pactual. Novo Mercado list as of October 14 2009 (Bovespa website). Abyara, Nossa Caixa, Klabin Segall and Tenda removed from the original list
 Getting to Know Brazil page 6
23 November 2009

Required Disclosures
This report has been prepared by Banco BTG Pactual S.A. The figures contained in
performance charts refer to the past; past performance is not a reliable indicator of future
results. Additional information will be made available upon request.

BTG Pactual
Definition Coverage1 IB Services2
Rating
Buy Expected total return 10% above the company’s sector average. 40% 76%
Expected total return between +10% and -10% the company’s
Neutral 51% 60%
sector average.
Sell Expected total return 10% below the company’s sector average. 9% 29%
1: Percentage of companies under coverage globally within the 12-month rating category.
2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were
provided within the past 12 months.

Absolute return requirements

Besides the abovementioned relative return requirements, the listed absolute return
requirements must be followed:
a) a Buy rated stock must have an expected total return above 15%
b) a Neutral rated stock can not have an expected total return below -5%
c) a stock with expected total return above 50% must be rated Buy

Analyst Certification
Each research analyst primarily responsible for the content of this investment research
report, in whole or in part, certifies that:
- all of the views expressed accurately reflect his or her personal views about those
securities or issuers, and such recommendations were elaborated independently, including
in relation to Banco BTG Pactual S.A. and/or its affiliates, as the case may be;

- no part of his or her compensation was, is, or will be, directly or indirectly, related to the
specific recommendations or views expressed by that research analyst in the research
report.
Research analysts contributing to this report who are employed by a non-US Broker dealer
are not registered/qualified as research analysts with the NASD and NYSE and therefore
are not subject to the restrictions contained in the NASD and NYSE rules on
communications with a subject company, public appearances, and trading securities held
by a research analyst account.

Brazilian Regulation CVM 388

Each research analyst primarily responsible for the content of this investment research
report, in
whole or in part, certifies that:
- all of the views expressed accurately reflect his or her personal views about those
securities or
issuers, and such recommendations were elaborated independently, including in relation to
Banco BTG Pactual S.A., as the case may be;
- no relationship is maintained with any person who works for the subject companies which
securities are mentioned on this research;
- Banco BTG Pactual S.A. and/or its affiliates (including the funds, portfolios and
investment clubs in securities managed by them) do not own directly or indirectly 1% or
more of the total capital of the subject company(ies) JBS S.A., BM&F Bovespa S.A., B2W
Companhia Global do Varejo, Redecard S.A., CREMER S/A, GVT Holding S.A., Amil
Participações, LOJAS HERING S/A, Diagnósticos da América S.A., Lojas Renner S.A.,
Positivo Informatica SA or are involved in the acquisition, alienation or intermediation of
such securities in the market;
- does not hold, directly or indirectly securities of the subject companies which represent
5% or more of his or her net worth, and is not involved in the acquisition, alienation or
intermediation of such securities in the market;
- the analyst does not receive compensation for any services rendered or presents any
commercial relationships with any of the subject companies or person, entity or any kind of
funds which represents the same interest of the subject companies;
- no part of any of the research analyst' s compensation was, is, or will be directly or
indirectly related to the pricing of any of the securities issued by any of the subject
companies and/or to the specific recommendations or views expressed by the research
analyst in this research although part of the analyst'
s compensation comes from the profits
 Getting to Know Brazil page 7
23 November 2009

of Banco BTG Pactual S.A. and/or its affiliates and, consequently, revenues arisen from
transactions held by Banco BTG Pactual S.A. and/or its affiliates
- Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services
rendered or presents any commercial relationships with the subject company(ies) JBS
S.A., BM&F Bovespa S.A., B2W Companhia Global do Varejo, GVT Holding S.A., Amil
Participações, Diagnósticos da América S.A., Positivo Informatica SA or person, entity or
any kind of funds which represents the same interest of subject company(ies);
- Banco BTG Pactual S.A. and/or its affiliates does not receive compensation for any
services rendered or presents any commercial relationships with the subject company(ies)
Redecard S.A., CREMER S/A, LOJAS HERING S/A, Lojas Renner S.A. or person, entity or
any kind of funds which represents the same interest of subject company(ies)

Risk Statement
We believe the key risks are additional competition and regulatory issues. In addition, there
are potential risks inherent in investing in emerging market countries. Potential emerging
market related risks include, but are not limited to, the volatile nature of the currency,
regulatory and sociopolitical risk, and abrupt potential changes in the cost of capital and
economic growth outlook. Valuations can also be affected by "contagion" from
developments in other emerging markets.

Company Disclosures
JBS S.A. 1, 2, 3, 4
BM&F Bovespa S.A. 1, 2, 3, 4
B2W Companhia Global do Varejo 1, 2, 3, 4
GVT Holding S.A. 1, 2, 3, 4
Amil Participações 1, 2, 3, 4
Positivo Informatica SA 1, 2, 3, 4
Diagnósticos da América S.A. 10

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has
received compensation for investment banking services from this company/entity.
2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek
compensation for investment banking services and/or products and services other than
investment services from this company/entity within the next three months.
3. Within the past 12 months, Banco BTG Pactual S.A has received compensation for
products and services other than investment banking services from this company/entity.
4. This company/entity is, or within the past 12 months has been, a client of Banco BTG
Pactual S.A., and investment banking services are being, or have been, provided.
10. Banco BTG Pactual S.A. makes a market in the securities of this company.
 Getting to Know Brazil page 8
23 November 2009

Global Disclaimer
This report has been prepared by Banco BTG Pactual S.A. (“BTG Pactual”). Either BTG Pactual or Tradewire Securities
LLC (“Tradewire”), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the
Financial Industry Regulatory Authority and the Securities Investor Protection Corporation, is distributing this report in the
United States. Tradewire assumes responsibility for this research for purposes of U.S. law to the extent it distributes this
report. This report can only be distributed to US persons by Tradewire or to major US institutional investors only by either
BTG Pactual or Tradewire. All transactions by a US person in the securities mentioned in this report must be effected
through Tradewire. Any U.S. person receiving this report and wishing to effect any transaction in a security discussed in
this report should do so with Tradewire at 786-623-2330, 1441 Brickell Avenue, Suite 1210, Miami, FL 33131.
This report is for distribution only under such circumstances as may be permitted by applicable law. Nothing in this report
constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate
to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for
information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy
or sell any securities or related financial instruments in any jurisdiction. The information herein is believed to be reliable as
of the date in which this report was issued and has been obtained from public sources believed to be reliable. No
representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of
the information contained herein, except with respect to information concerning BTG Pactual, its subsidiaries and
affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to
in the report.
As of the end of the month immediately preceding the date of publication of this report, neither Tradewire nor any its
affiliates beneficially own 1% or more of any class of common equity securities of the companies analyzed in this report.
In addition, neither Tradewire nor its affiliates: (a) have managed or co-managed a public offering of securities for the
companies; (b) have received compensation for investment banking services from the companies in the past 12 months;
of (c) expect to receive or intends to seek compensation for investment banking services from the companies within the
next 3 months.
Tradewire did not engage in market-making activities in the subject company'
s securities at the time this research report
was published.
Tradewire does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor
accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in
making their investment decisions. The report should not be regarded by recipients as a substitute for the exercise of
their own judgment. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst
responsible for the substance of this report as of the date in which was issued and are therefore subject to change
without notice and may differ or be contrary to opinions expressed by other business areas or groups of Tradewire as a
result of using different assumptions and criteria. Prices and availability of financial instruments are indicative only and
subject to change without notice.
Research will initiate, update and cease coverage solely at the discretion of BTG Investment Bank Research
Management. The analysis contained herein is based on numerous assumptions. Different assumptions could result in
materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk
personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market
information. Tradewire is under no obligation to update or keep current the information contained herein, except when
terminating coverage of the companies discussed in the report. Tradewire relies on information barriers to control the flow
of information contained in one or more areas within Tradewire, into other areas, units, groups or affiliates of Tradewire.
The compensation of the analyst who prepared this report is determined by research management and senior
management (not including investment banking). Analyst compensation is not based on investment banking revenues,
however, compensation may relate to the revenues of BTG Pactual as a whole, of which investment banking, sales and
trading are a part.
The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors.
Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered
risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to
fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results.
If a financial instrument is denominated in a currency other than an investor’s currency, a change in rates of exchange
may adversely affect the value or price of or the income derived from any security or related instrument mentioned in this
report, and the reader of this report assumes any currency risk.
This report does not take into account the investment objectives, financial situation or particular needs of any particular
investor. Investors should obtain independent financial advice based on their own particular circumstances before
making an investment decision on the basis of the information contained herein. For investment advice, trade execution
or other enquiries, clients should contact their local sales representative. Neither Tradewire nor any of its affiliates, nor
any of Tradewire' s or any of its affiliates, directors, employees or agents accepts any liability for any loss or damage
arising out of the use of all or any part of this report.
Any prices stated in this report are for information purposes only and do not represent valuations for individual securities
or other instruments. There is no representation that any transaction can or could have been effected at those prices and
any prices do not necessarily reflect BTG Pactual' s internal books and records or theoretical model-based valuations and
may be based on certain assumptions. Different assumptions, by BTG Pactual or any other source, may yield
substantially different results.
Analyst compensation: compensation paid to analysts are the sole responsibility of BTG Pactual.
United Kingdom and the rest of Europe: Except as otherwise specified herein, this material is communicated by BTG
Pactual, to persons who are eligible counterparties or professional clients and is only available to such persons. The
information contained herein does not apply to, and should not be relied upon by, retail clients. United States: Distributed
to US persons by either Tradewire, BTG Pactual that is not registered as a US broker-dealer (a “non-US affiliate”), to
major US institutional investors only. BTG Pactual and/or Tradewire accepts responsibility for the content of a report. All
transactions by a US person in the securities mentioned in this report must be effected through Tradewire.
The disclosures contained in research reports produced by BTG Pactual shall be governed by and construed in
accordance with English law.
This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the
prior written consent of BTG Pactual. Additional information relative to the financial instruments discussed in this report is
available upon request.