GMB - How was the Hebara meeting with the representatives of the Ministry of Finance, BNDES and E/Y on the Road Show about LOTEX that was held in Rio de Janeiro last week? What was the main subject?
Amilton Noble - I was extremely well attended, as always, they are very solicitous. But, I was very surprised by the revelation on the eve of the bidding that Caixa can not participate. It was a surprise even because at the public hearing of the last Road Show they said that Caixa could participate. This was my great surprise, because we, as national operators, are deprived of participation alone because of the billing requirement that no company in Brazil has, nor the Caixa. Caixa itself can not participate alone, we can not go alone.
A company with the expertise of Hebara of 25 years operating instant lottery in the whole Brazil, lately only in Rio de Janeiro, but we operate in Rio Grande do Sul, Paraná, Bahia, several other states; we are prevented from operating alone and obviously, as a business opportunity we envisage the possibility of entering and we believe that it is very important that Caixa participate in this announcement because it is the guarantee that distribution will happen in all states and practically in all municipalities. No network has the distribution capacity that Caixa has. Even an operator enters to the business, the absence of Caixa will cause a distribution privilege in certain states.
Is Caixa’s absence total? Is the possibility of the state bank entering into a consortium also already discarded?
They were categorical: Caixa is prohibited from participating either alone or as a participant in a consortium. This was a big surprise because five months ago it was contemplating the constitution of a consortium, obviously with foreign companies that are the only ones that allow us to have the absurd requirement, which leaves us stunned (the minimum collection of R$ 1.25 billion year --US$360m-). But, they categorically showed me an item in the edict, which in my view is a tremendous absurdity, which is wanting to throw pepper in everyone's eye. I was pointed out item 5.3.4, if I am not mistaken, that would leave the Caixa out, but that has no indication that is a technical issue. And the edict does not prohibit Caixa, so obviously this is a government decision that is not foreseen in the public edict.
In your view, what consequences will the prohibition of the inclusion of Caixa in the bidding of LOTEX bring to the whole process?
In my opinion, any bidder should count on Caixa as a participant in its consortium because it guarantees distribution throughout the national territory. If you take the 13,000 lottery points of sale, it is present in 99.9% of the municipalities, there are very few municipalities in Brazil that do not have a Caixa branch. The absence of Caixa makes the winning bidder have difficulty reaching more distant places and causes it effectively and especially by the absence of goals; which is the second absurdity of this auction because it is inconceivable that you require the bidder to have prior experience, a turnover of US$360 million, or that you will not have a concern about the company's operating capacity. Now, from the time you demand a prior experience with defined billing you would, at the very least, have to require that the operator ensure an operation on values consistent with the requirements. So I have to have billed US$28 million a year, I can win the contract and bill US$145,000 a month and it's all right because it has no goal, that is, it's absolutely disproportionate.
What is your overall assessment of the meeting about LOTEX?
Technically, I had all the information I requested, but I was really surprised by the change of position of the Ministry of Finance and BNDES, who are capitalizing on this process, because in September at the public hearing they stated categorically that Caixa could participate. In October when I had the first round of Road Shows here in Rio they categorically stated that Caixa may be in the bidding. The absence of Caixa now imposed by an unclear decision, not established in public notice, is a great surprise of and effectively, on our part, removes the possibility of eventually being able to participate.
Which are the obstacles that make it impossible for Hebara to participate in the LOTEX case because of the absence of Caixa?
The absurd requirement of a minimum turnover of US$28 million is an obstacle, mainly associated to require a minimum billing and not require a minimum guarantee, a performance goal. There is no minimum performance goal, there is no minimum distribution goal, that is, if I win this bidding process, I can define for a business position that I will only work in Rio de Janeiro and São Paulo and I will exclude 25 states because it may not interest me to operate. Obviously, it may interest other bidders, but, in our view, a contract with this 15-year term should not leave the operator's definition of where he will do business. Lottery is only allowed, only has viability, to generate resources for the economy and especially for social activity. And the absence of mandatory and of the Caixa in this process, in our view, jeopardizes the generation of resources and income, economic activity, by decision of the operator which gain exclusively in the offer of where there is commercial interest.
What projection do you make about the outcome of the LOTEX process and the future of the instant lottery operation in Brazil?
Most likely, who will win is an international company or a consortium of international companies with the goal of introducing themselves in Brazil. The main objective of these companies is not the operation of LOTEX; are the other Caixa products and the sports bettings that are coming. And who is established will have an advantage over the others. If it is this way of an operation where Caixa does not participate and does not have a guarantee of minimum distribution in the regions, states and municipalities, I think it will be a great prize because nobody will be able to compete because it is a very cheap process for the international market. US$150 million for 15 years is a very cheap process for an international company to enter into a country like Brazil.
The only concern with the grant is what the government is doing, without a minimum guarantee, seems to be insufficient for a government decision. Theoretically a government decision should determine that over time the operator had a minimum performance and that this performance would be guaranteed in a minimum percentage of municipalities in Brazil to generate income and economic activity. My perception is that they will deliver a completely unexplored market that in the future may be really big, but without some concerns that, in our view, both the Ministry of Finance and the BNDES should have taken. The eagerness to lay hands on the grant meant that the guarantees of execution were minimized or even extinguished. There are no guarantees in the 15 years of execution because the concern was to have a bidder and that this bidder pays the US$145 million; and we think that is not very careful.
Source: GMB Exclusive
