ADRs' outstanding:  22.1 million.

Current assets – total liabilities (Dec. 31^st, 06):  -($96) million.

Est. Enterprise Value:  $743 million.

Est. 2007 EBITDA:  $145 million.

Chileans have access to a very progressive pension system, which has replaced the North American equivalent of the social security government pension.   Under this program, all non self-employed workers automatically have a portion of their wages deducted at source.  Depending upon age, workers can choose among 5 separate pension fund products.  Workers can opt for a largely "defined benefit" pension account, a primarily "defined contribution" account or something in between.       

Administradora de Fondos de Pensiones Provida SA (PVD) is Chile's largest pension fund manager.

At year end 2006, Provida had AUM of $27.5 billion, which was a 31% market share of the Chilean pension fund business.  These assets were up by 18% from the $23.3 billion reported at year end 2005.

Provida reports a 42% market share based upon its 3.2 million clients. PVD customers deposited $851 million of new money to pension funds in 2006.

Provida has a deep moat, which should serve it well in the years ahead.

When the Chilean pension fund administration business was created in 1981, a host of competitors set up shop. Over time, the number of firms has declined from 31 to just 6, with Provida being the largest by far. Based upon assets, Provida is 31% larger than the nearest competitor, and has almost 47% more active customers than its nearest competitor.

Payroll for PVD staff averaged about 25% of total operating expenses in 2006.  In this regard, Provida seems considerably more efficient than competitors.  This is undoubtedly due to the firms's ability to amortize staff costs, over a much larger pool of assets, than peers.

The industry is shaping up as an oligopoly.  2 of the 5 other competitors are only marginally profitable, and may eventually be absorbed.  Provida, as the market leader, is able to charge lower prices, while enjoying economies of scale through its relatively larger size, in relation to peers.

As an indication of its financial strength, Provida was able to raise its overall fee structure by 6% in May 2006, while still underpricing the lowest cost competitor by 7%.  

Provida's affiliation with a global bank adds to its defensible position.

Provida, along with the 5 other competitors in its industry, must also provide life and disability insurance to all customers under its umbrella.  Banco Bilbao Vizcaya (a global banking giant which owns 51.62% of the outstanding shares of Provida) provides PVD with the life and disability insurance coverage required.  This represented about 53% of total operating expenses in 2006.  Several of the smaller firms must purchase insurance from non captive sources, which undoubtedly costs more.

Revenues are much like that of any North American asset manager or pension fund company.

PVD earns its revenues similar to that of mutual fund/pension fund and insurance firms in North America.   Provida receives fees on funds managed, earns monthly collection fees for obtaining the capital and is paid various other administrative fees.  The average management fee earned in 2006 was about .56% on fund assets.  This level of fee is comparable to the typical North American asset management firm.  Provida differs from many firms however, in the respect that all asset management is done internally.  No revenue is pieced off to subadvisors.  Consequently, PVD is considerably more profitable than most similarly sized North American counterparts on an "apples to apples" comparison.

One distinction between Provida and North American asset managers lies in a capital reserve requirement. PVD must maintain a capital reserve equal to at least 1% of the total assets under management.  This money can be invested in fixed income deposits to earn more revenue.

Provida estimated that over 31% of its assets under management at year end 2006 ($8.5 billion) were in non Chilean investments.

Provida has aspirations to become a large pension fund administrator in other jurisdictions.

Provida holds minority interests in other pension fund operators in Peru, Mexico and the Dominican Republic.  Through these equity interests, PVD effectively controls an additional $1.2 billion of AUM.  In 2006, EBITDA generated on these holdings totaled $8.3 million.     

If the 4^th quarter 2006 figures can be maintained, strong EBITDA growth may lie ahead.

Revenues were $90.94 million in that quarter.  EBITDA was $39.57 million or 43.5% of revenues, which was a record.  While it may be a mistake to simply annualize this amount ($158.2 million of EBITDA) in order to predict potential 2007 earnings; this does underscore the profit potential of Provida, should all go well.

Provida represents a bet on continued growth in global equity markets and on growth in the Chilean economy.

In 2006, revenues were $316.47 million.  EBITDA on this revenue in 2006 was $120.1 million, or 38% of revenues.

If one assumes that Provida funds can obtain an average 6% return in 2007, and that it adds $851 million of new assets, the firm could average $30 billion of direct AUM.  This may result in revenues touching $345 million. EBITDA could be $140 million. 

Provided that Provida can average a 10% return for 2007,  direct AUM may exceed $31 billion in 2007.  Revenues could be as high as $357 million, and EBITDA might exceed $150 million.

If 4th quarter EBITDA run rates continue, my estimates may prove to be conservative.

Based on my short term outlook for Provida, I will buy shares personally, and for the blog model portfolio.

Global equity markets have already posted strong performance gains in 2007.  In order for PVD to achieve year end AUM of $31 billion, equity markets merely need to hold the gains earned YTD, over the balance of 2007.

I estimate that PVD can generate enough EBITDA to fund its 1% reserve on an additional $4 billion of AUM, raise its dividend somewhat, and pay down an additional $40 million of total liabilities.  This suggests that the year end EV could be less than $700 million.   If correct, this could price the shares of Provida at less than 4.9X est. EV/EBITDA.   For the #1 asset manager in its field, this seems inexpensive to me.

I do not recommend this as a stand alone purchase, for many reasons.

One assumes currency risk, political risk, economic risk and stock market risk when considering ownership of this company.  Asset managers in general represent "leveraged" bets on strong stock markets.  Asset management shares typically outperform in bull markets, and badly underperform during bear markets. 

As a result, any investment should only be considered within a well diversified global portfolio. 

The shares will be paid for through the sale of PONR.

PONR was purchased on January 31^st, 2007 at a price of $29.52 per share. Since that time, the firm has agreed to be acquired by Olin Corp. for a cost of $35 per share.    The transaction could close in about 3 month's time.  Based upon June 1^st, 2007 closing price of $34.39 per Pioneer share, this represents a return of about 16.5%.

This marks the first sale transaction since the inception of the blog, approximately 1 year ago. 

I will add PVD to the portfolio at the market open, and will sell out PONR at the same time.   Provida will be given the equal 4% weighting as all other securities in the blog portfolio.  With the sale of PONR and the purchase of PVD, the portfolio continues to hold 25 stocks.