Cresud S.A.C.I.F. y A

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Cresud S.A.C.I.F. y A.

Edificio Inter-Continental Plaza
Calle Moreno 877, 23rd Floor
Buenos Aires, C.F. C1091AAQ
Argentina
Telephone: (54) (11) 4344-4600
Fax: (54) (11) 4344-4611
Web site: http://www.cresud.com.ar

Public Company
Incorporated: 1936
Employees: 245
Sales: ARS 71.95 million ($25.97 million) (2003)
Stock Exchanges: Bolsa de Comercio de Buenos Aires NASDAQ
Ticker Symbols: CRES; CRESY
NAIC: 111110 Soybean Farming; 111120 Oilseed (Except Soybean) Farming; 111140 Wheat Farming; 111150 Corn Farming; 112111 Beef Cattle Ranching and Farming; 112112 Cattle Feedlots; 112120 Dairy Cattle and Milk Production

Cresud S.A.C.I.F. y A. is a corporate farmer and rancher. One of Argentina's largest agriculture and livestock enterprises, it is gambling that the nation's fertile pampas will reach their potential to help meet the world's growing food needs. Much of its vast holdings in eight Argentine provinces is used to produce crops, beef cattle, and dairy products that the company then markets. It also leases land for these purposes. Cresud employs modern farm technology and diversifies its crops to reduce dependence on price fluctuations in the commodity markets.

Cresud's Evolution: 1936–95

Cresud was incorporated in 1936 as a subsidiary of Crédit Foncier, a Belgian company engaged in several activities, including providing rural and urban loans in Argentina. The incorporation had several purposes, including to administer real estate holdings foreclosed by Crédit Foncier. This company was liquidated in 1959. As a part of the liquidation, Cresud's shares were distributed to Crédit Foncier's stockholders and, in 1960, these shares were listed on the Bolsa de Comercio de Buenos Aires. During the 1960s and 1970s Cresud's business shifted exclusively to agricultural activities.

Eduardo S. Elsztain worked for his family's small real estate company in Buenos Aires during the 1980s. After the firm fell victim to the crisis-ridden decade's economic ills, Elsztain took a year off in 1990 to live in New York City. An Orthodox Jew, he spent mornings studying Torah with members of a Brooklyn-based sect and afternoons seeking to convince potential investors that Argentina, under a new presidential administration, was ready to return to prosperity. Elsztain talked his way into the office of George Soros, the fabulously wealthy operator of successful hedge funds, and emerged with a war chest of $10 million earmarked for the purchase of undervalued Argentine stocks and real estate. He purchased a shell company named IRSA Inversiones y Representaciones S.A. and soon turned it into the nation's largest real estate firm.

Real estate, for Elsztain, meant not only holdings in Buenos Aires and other urban areas but also the ample expanses of the nation's plains—or pampas—renowned for their fertility and favorable climatic conditions for agriculture. Argentina's economic decline had left this land undervalued in comparison to similar properties in Australia, Canada, and the United States. The great landed estates on the pampas had been repeatedly subdivided, resulting in holdings that, because of lack of capital, low productivity, and high debt, were on sale at attractive prices. By leasing such properties to others, or by hiring professional managers to enhance production and augment profitability, the purchaser had the opportunity to achieve a high rate of return without making major investments. The reduction of taxes on farm exports in the early 1990s also promised to make an investment in this area more attractive, as did Washington's lifting of barriers against the import of Argentine beef, imposed earlier due to fears of contagion from hoof-and-mouth disease.

To this end, Elsztain started buying shares of Cresud in 1992 and purchased 51 percent of the company in 1994 for $11.2 million. In all, he paid $25 million for the company. His group of investors included Quantum Industrial Partners LDC, a hedge fund whose investment adviser was Soros's company, Soros Fund Management LLC. Elsztain took the position of chief executive officer but entrusted day-to-day management to his brother Alejandro, a professional agronomist. Soros stayed out of the limelight. "He knows how we're growing, but he doesn't know the name of each cow," a company executive told Peter Hudson, writing for América economía, in 1997.

In addition to $61.8 million from Soros's group, Cresud, in 1995, garnered $64 million from a public offering on Bolsa de Comercio de Buenos Aires and, six months later, an additional $26.2 million. As the only publicly traded enterprise of its kind in Argentina, Cresud had the resources other farms and ranches lacked: professional management, ample access to capital and technology, and a low level of debt. Nevertheless, skeptics noted that most of the company's capital had been placed in short-term investments.

Rural Giant: 1996–2002

Cresud's net worth increased from $17.1 million to $89.4 million at the end of 1996 (the year ended June 30, 1996). During this period the company's holdings rose from 20,263 hectares (50,071 acres) with 22,000 head of cattle to 345,410 hectares (853,522 acres) of farms, ranches, and woodlands in six provinces. "Many of the people we buy from are traditional farming and ranching families," Alejandro Elsztain told Ken Warn of the Financial Times in 1998. "They have the land but no capital to invest in modernising production." He added, "Food demand will increase. Europe and the US will not subsidise agriculture forever, and the replacement for that will be Argentina." He also noted that, with the establishment of the Mercosur common market, Brazil had become an enormous market for Cresud's products.

Cresud entered the international equity markets in 1997 by a stock offering on the NASDAQ that raised $92 million. The infusion of funds allowed Cresud to purchase, for $25 million, 51,000 hectares (126,000 acres) with 87,000 head of cattle in Santa Fe province from Swift Armour S.A., an acquisition that raised its stock of cattle to 170,000. Also in 1997, Cresud formed a joint venture with Texas-based Cactus Feeders, Inc., the second largest feedlot company in the United States. The partners announced that they would begin fattening 100,000 calves a year on corn, thereby producing the well-marbled cuts of beef preferred by American and Asian palettes in place of traditional lean, grass-fed beef. Their 7,000-hectare (17,500-acre) feedlot opened in 1999 in Villa Mercedes, San Luis. The practice of raising livestock on feed farms was said to lower cost and boost output as well as raise quality. Cresud also was employing biotechnology to increase crop yields and irrigate marginal land extensively.

By now Argentina's agricultural boom was in full swing, making future land acquisitions more expensive. There was a big rise in the nation's grain and meat production between 1992 and 1997, and an even greater increase in such inputs as fertilizer and irrigation equipment. Farmers and ranchers were earning a much higher rate of return than their counterparts in the United States.

Luciano Benetton was the largest landowner in Argentina by 1997. He owned six large ranches in Patagonia covering 900,000 hectares (about 2.25 million acres), on which he raised Merino sheep to yield wool for his family's clothing chain. Benetton even employed satellite images to find out what his flocks preferred to eat. In Patagonia's lake district, such American celebrities as actor Sylvester Stallone and media tycoon Ted Turner bought large spreads—as did Soros himself—to become gentlemen ranchers and enjoy some of the most spectacular scenery in the world.

By the end of 1998 Cresud's land inventory had grown to 26 farms and 475,098 hectares (1.17 million acres), making the company Argentina's leading producer of beef and grain. But in 1999 the company sold, for $16.8 million, Runciman, a dairy and crop farm 380 kilometers (235 miles) northwest of Buenos Aires that it had bought in 1995 for $7.7 million. Cresud was now entering a more difficult period, darkened by a growing economic recession in Argentina and weak commodity prices for the company's products. Soros's fund, which still held 29 percent of Cresud after the 1997 public sale of shares in the United States, eventually sold most of its stock. Elsztain found a new American partner, Michael Steinhardt, in 2001. Steinhardt—like Soros, a former hedge fund operator—took one-quarter of the shares of Inversiones Financieras del Sud S.A., a Uruguay-based investment company controlled by Elsztain and his partners in IRSA and Cresud. This investment company held 30 percent of Cresud's shares, with pension fund managers holding another 28 percent, institutional investors holding 12 percent, and other public investors holding 28 percent.

Although Cresud's sales remained essentially flat between fiscal 2000 and 2003 and below the levels of the two previous years, the company remained profitable except in 2002, when capital flight and the subsequent devaluation of the peso played havoc both with Argentina's economy and that of its busi[fJ]nesses, including Cresud. Seeking funds to finance its dollar-denominated debts—which grew sizably with the devaluation of the peso—the company sold seven of its farms for a total of $85.8 million between 2001 and 2003. But the devaluation also had some useful effects, reducing Cresud's costs as well as making its products more competitive with those deriving from other countries. In the annual report for 2003 Elsztain declared that agricultural land values in dollars had returned to the levels before devaluation.

Company Perspectives:

One of Cresud's advantages is its concentration in Argentina, a country known for the quantity and quality of its land as well as its role as one of the main exporters of agricultural products. Cresud's strategy is to continue consolidating its position as one of the leading companies in the market.

Cresud's Prospects in 2003

Of Cresud's properties at the end of 2003, only two were original holdings of the Elsztain-managed company. The larger was Los Pozos in the province of Salta. Purchased in 1995, it consisted of some 262,000 hectares (about 647,000 acres) in a semiarid region, with natural woodland yielding hardwoods for poles and charcoal. More than 15,000 beef cattle had been placed on this tract, and since the sparse rainfall fell mostly in the summer, it was considered to have potential for crops such as cotton, beans, sorghum, and corn. Purchased in 2003 for $9.2 million, El Tigre in La Pampa province was subsequently rated by the company as the most valuable of Cresud's farms. Valued by the company at ARS 26.8 million ($9.67 million), La Suiza in Chaco province was intended for cattle breeding and 21,402 head of beef cattle in 2003. La Juanita, in Buenos Aires province, was Cresud's chief dairy farm, with 1,002 milking cows in mid-2003. Other parts of the farm were being used for crop production and for cattle grazing on sown and natural pastures. San Nicolás, in Santa Fé province, and Las Playas, in Córdoba province, were owned by Agro-Uranga S.A., a company in which Cresud held a 36 percent share in mid-2003. San Nicolás was used for crop production; Las Playas was being used for crop production and the raising of both beef and dairy cattle.

In September 2003 Cresud owned 17 farms and 430,401 hectares (1.06 million acres), of which 139,317 hectares (344,258 acres)—mostly pasture rather than cropland—were under production. The rest was natural woodland. Some 3,093 hectares (7,463 acres) were under irrigation. Cresud hired personnel to manage the farms. Heads of cattle numbered 83,767, and dairy farm stock, 2,768. The company also was leasing 8,489 hectares (20,977 acres) of land, and this leased land accounted for 58 percent of the total sown for crops. Production in 2003 included, in metric tons, corn, 27,508; soybeans, 25,856; wheat, 9,397; and sunflower seeds, 3,074. Beef came to 9,121 metric tons and milk to 6.02 million liters. Some of Cresud's grain and milk was exported, but none of the beef. Of the company's sales of ARS 71.95 million ($25.97 million), crops accounted for 71 percent, beef cattle for 24 percent, and milk for 3 percent. Operating income was ARS 27.68 million ($9.99 million), a 70 percent gain over the previous year.

Between 2000 and 2002 Cresud purchased 20.3 percent of IRSA's common stock for ARS 127.26 million ($45.4 million) and owned 22.65 percent of the company at the end of 2003, when it also held $49.7 million in IRSA convertible notes. During the same period Cresud also acquired 70 percent of Futuros y Opciones.Com S.A., a business site on the Internet.

Cresud issued $50 million in convertible bonds in 2003 and had outstanding debt of ARS 139.4 million ($50.3 million), all in convertible notes maturing in 2007, at the end of the fiscal year. Eduardo Elsztain owned 34 percent of Cresud's common stock in late 2003 through Inversiones Financieras del Sud. Pension funds owned another 11 percent. Elsztain was president and chairman of the company, while his brother Alejandro was chief executive officer. Cresud's top managers were being paid a 10 percent fee on the company's annual net income, which came to ARS 65.03 million ($23.48 million) in 2003.

Principal Subsidiaries

Cactus Argentina S.A. (50%); Futuros y Opciones.Com S.A. (70%); Inversiones Canaderas S.A.

Key Dates:

1936:: Cresud is incorporated as a subsidiary of a Belgian company.
1960:: The company's shares are listed on the Bolsa de Comercio de Buenos Aires.
1994:: Backed by George Soros, Eduardo S. Elsztain purchases a majority stake in Cresud.
1996:: Cresud now owns nearly a million acres of farms, ranches, and woodlands.
1997:: The company purchases a big ranch from Swift Armour S.A.
1998:: Cresud, with 26 farms and ranches, is Argentina's biggest producer of beef and grain.
1999:: Cresud opens a cattle feedlot as a joint venture with a Texas-based company.
2002:: The company loses money in a crisis-ridden fiscal year.
2003:: Cresud has sold seven farms in order to restructure its debts.