Gustavo Ballvé on October 21st, 2009
Food for thought, Healthcare, Industries, Insurance, Investment Themes, Mental models, Portfolio Management

The merger between Odontoprev and Bradesco Dental highlights the advantage of looking at industries and companies globally. The game is NOT about being the best “brazilian” investor you can be. It’s about being the best investor you can be, period. There’s a world of difference between the two propositions (pun intended).

A few days ago Odontoprev and Bradesco announced a merger of their Dental care operations (Portuguese and English version of the PDFs). In summary, Bradesco Dental is integrating its dental plan assets (including cash) into Odontoprev in exchange for 43.5% of the new company. At the same time, ODPV is distributing its entire pre-deal cash hoard for shareholders of record before the deal. There will be shared control of the new company, but the ODPV executive team remains largely in place (and Randal Zanetti remains a significant owner with some 7.4% of the new company).

Instead of highlighting an investment rationale, we want to generalize a bit regarding the benefits of looking at industries globally rather than locally.

Rather than start with the concept, let’s give examples. One example is the advantage Brazilian investors had, for a while, over foreign investors when Interbrew “acquired” Ambev and InBev was formed. The difference in perception between what they saw (“who are these brazilian guys coming to run InBev?”) and our perception (“even discounting the tighter labor regulations in Europe, these guys will extract efficiencies in so many levels and very quickly”) gave us an analytical edge. So from the Belgian investor perspective, knowing what was going on in arguably the world’s best-run beer company would have paid off handsomely. You can even say that it happened again in the Anheuser Busch – InBev deal.

With Odontoprev, which is just the latest example we can think of, the advantage was to see it as a Brazilian peculiarity. Practically nowhere in the world could we see an independent dental care plan operator. In the US, for instance, the health insurers have over decades absorbed dental plans and have been offering it for ages as part of “ancillary services” – mostly tied to Vision care (something Brazil is yet to develop – entrepreneurs, listen up!). Of course, MetLife, the world’s largest dental plan operator is not a health insurer, but that company ties its dental offering to a series of other employee benefits. The distribution of dental plans, with its relatively low ticket, makes a lot more sense inside a larger organization. We always looked at Odontoprev as a candidate for some kind of association with companies with large distribution capabilities for corporations. While it’s true that the company could continue to pursue its independence, at the end of the day we saw that its top-notch management wouldn’t destroy value.

Of course, none of this would have mattered if the management wasn’t top-notch, the alignment between minority shareholders and the owner-managers wasn’t great, if one’s thorough and relentless analysis of the company’s business didn’t point to Odontoprev as the sector’s class act – and, most importantly, if the price wasn’t right. But the fact remains that we can greatly improve where and how we get our “building blocks” by looking abroad. It’s the “crystal ball that works” – we wish it was that good, but we find more and more over the years that we gain valuable insights.

Investing is looking for an edge, and analyzing industries globally simply allows one to form better opinions regarding their investment cases. In some cases, NOT doing it may blind you to risk factors not previously seen. In this case, it also allows us to see what huge advantages the new company has inside Bradesco. In the company’s own words, “The Association shall result in economies of scale and synergies through the combination of best practices of both companies in claims management, and, mainly, of the integration of the commercial platforms and access to Banco Bradesco’s nationwide distribution channels.

We’ll finish by pointing that while we have been doing this for over 10 years and it’s now ingrained in our investment philosophy, we also don’t see a viable alternative. Investing is increasingly a global activity, as we’ve seen over the years in our local investments. The “foreigners” are doing their homework and the tools to obtain information are better than ever. The activity is changing, like it or not. Your competitor is or will be global in perspective, so choosing not to be global yourself doesn’t seem, well, the best rational and long-term view.

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