VZCZCXRO8975
RR RUEHRG
DE RUEHSO #0115/01 0671743
ZNR UUUUU ZZH
R 071743Z MAR 08
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 7978
INFO RUEHBR/AMEMBASSY BRASILIA 9125
RUEHRG/AMCONSUL RECIFE 4031
RUEHRI/AMCONSUL RIO DE JANEIRO 8625
RUEHBU/AMEMBASSY BUENOS AIRES 3083
RUEHAC/AMEMBASSY ASUNCION 3331
RUEHMN/AMEMBASSY MONTEVIDEO 2636
RUEHSG/AMEMBASSY SANTIAGO 2332
RUEHLP/AMEMBASSY LA PAZ 3741
RUCPDOC/USDOC WASHDC 3046
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NATIONAL SECURITY COUNCIL WASHDC
RUEHC/DEPT OF LABOR WASHDC

UNCLAS SECTION 01 OF 02 SAO PAULO 000115 
 
SIPDIS 
 
SIPDIS 
 
STATE PASS USTR FOR KDUCKWORTH 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR DMORONSE, NRIVERA, CMERVENNE 
DEPT OF TREASURY FOR JHOEK 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV BR
SUBJECT: BRAZILIAN STOCK EXCHANGES BOVESPA, BM&F IN MERGER TALKS 
 
REF: 07 SAO PAULO 0899 
 
¶1.  SUMMARY:  Bovespa Holding, the company that controls and manages 
the Sao Paulo Stock Exchange, and Brazil's Commodities and Futures 
Exchange (BM&F) informed Brazil's Securities Commission (CVM) and 
investors on February 19 that the two companies had initiated 
negotiations for a possible merger, but stressed that a deal had not 
yet been reached.  Their press statement said the two sides would 
announce the results within 60 days.  A merger would make the 
resulting company the second largest exchange in the Western 
Hemisphere behind the Chicago Mercantile Exchange (CME).  In 
addition to optimizing costs and increasing profits and reliability 
for investors, the merger could potentially boost investor 
confidence and attract more foreign investment.  The proposed merger 
is another example of companies taking advantage of the current 
strength of the Brazilian economy to make long-term decisions that 
should reap long-term benefits.  END SUMMARY. 
 
¶2.  On February 19, Bovespa Holding and Brazil's Commodities and 
Futures Exchange (BM&F) issued a statement to investors and the 
Securities Exchange Commission (CVM) that the two had initiated 
formal talks for a merger.  Neither Bovespa Holding Chief Executive 
Gilberto Mifano nor BM&F Chief Executive Edemir Pinto has guaranteed 
that any agreement will be reached from these discussions.  Both 
noted that the two companies will not give any further information 
before the end of the sixty-day period, during which both parties 
are restricted from initiating transactions with third parties. 
Press reports indicate that the two companies want to follow what 
the Chicago Mercantile Exchange (CME) did in 2007 when it merged 
with the Chicago Board of Trade, a step towards consolidating the 
world's stocks and futures exchanges. 
 
¶3.  The latest announcement follows last year's phenomenal stock 
performance and the initial public offerings (IPO) of both 
companies.  Bovespa Holding raised USD 3.8 billion in October with 
its IPO, which was Brazil's largest ever (Ref).  BM&F then 
accumulated USD 3.4 billion in its IPO only a month later. 
Following their IPOs, the stock prices of both institutions climbed 
52 and 22 percent respectively in 2007; however, in the first two 
months of 2008 both stocks had dropped back down to their IPO price 
ranges.  The market has reacted positively to the merger news with 
both companies' stocks climbing approximately ten percent each. 
 
¶4.  Trading volume has expanded strongly in recent years on both 
exchanges as international investors have moved into emerging market 
assets.  The consulting firm Economatica estimated the combined 
value of the merger at USD 18.5 billion, surpassing the New York 
Stock Exchange (NYSE).  Their current estimate is that Bovespa alone 
is worth USD 10 billion, well above many emerging market exchanges. 
For example, the Indian exchange is currently valued at USD 1.2 
billion and the Chinese exchange at USD three billion.  (Note: In 
October of 2007, prior to BM&F's IPO, the CME took a 10 percent 
stake in BM&F for two percent of CME.  BM&F is the fourth largest 
futures exchange in the world in terms of contracts negotiated.  End 
Note.) 
 
¶5.  The press and local financial interlocutors underscored the 
benefits of a merger which include reduced operating and 
administrative costs, as well as facilitation of shares and futures 
trading.  They also point to a reduced workforce and the potential 
to leverage business synergies.  Mauricio Oreng from Itau Bank told 
Econoff that the merger would be a net positive for Brazil's 
economy, and would elevate Brazil's role in world financial markets 
as well as potentially leading to regional consolidation of stock 
exchanges.  Oreng opined that the merger would attract more foreign 
investment because Brazilian markets are well regulated and 
investors are enthusiastic about merger negotiations.  Professor 
Alcides Leite from the Trevisan Business School said that the merger 
would provide the market with another very liquid and credible 
asset.  The Vice President for Treasury Operations Julio Sequera 
told Econoff that the merger would leverage economies of scale and 
existing synergies, however, that the merger depended on market 
conditions to succeed.  He expects the merger talks to result in a 
unification of the two exchanges. 
 
¶6.  COMMENT: The proposed merger of Brazil's largest exchanges looks 
 
SAO PAULO 00000115  002 OF 002 
 
 
set for a warm reception from shareholders who expect to benefit 
from cost savings and lower trading fees.  This is yet another 
example of how Brazil's strong economic performance is changing 
private sector investment and business strategies from reacting to 
short-term situations to making long-term decisions.  END COMMENT. 
 
¶7.  This cable has been cleared by the Embassy in Brasilia. 
 
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