Gafisa Acquires AlphaVille Urbanismo

Leading Brazilian homebuilder acquires Brazils largest community development company; Acquisition dramatically expands Gafisas capabilities and reach

SAO PAULO, Brazil--()--Gafisa S.A. (Bovespa:GFSA3), one of Brazils leading homebuilding companies, announced today that it has entered into a definitive agreement to acquire 100% of AlphaVille Urbanismo S.A.s (AlphaVille) shares. The closing of the transaction is subject to customary conditions, including required regulatory approvals. The transaction will be submitted to the ratification of Gafisas shareholders in accordance with article 256 of Brazilian Corporate Law.

The acquisition of AlphaVille, the largest community development company in Brazil and the only one with nationwide presence, further solidifies Gafisas position as the nations leading homebuilder. With AlphaVille, which will operate as a subsidiary of the company, Gafisa will expand its reach into new geographic markets, and combine both companies expertise to dramatically grow its residential, condominium, and community development initiatives. In particular, the combination of the two companies land banks (totaling R$4.1 billion in future sales) results in unparalleled future development opportunities.

We are very pleased to add AlphaVille and its industry-leading capabilities to Gafisas national homebuilding platform, said Wilson Amaral, Chief Executive Officer of Gafisa. By combining two of the most respected and well-known brands in the Brazilian residential sector, Gafisa and AlphaVille will benefit from a more competitive national platform, well-defined and complementary brand identities, and a wider range of products. This combination offers attainable synergies, and we expect it to be accretive to earnings over the next years, added Mr Amaral.

Gafisa will initially acquire 60% of the shares for R$201.7 million; acquiring the remaining 40% over the next five years. The implied valuation of AlphaVille at the acquisition price is R$383.5 million representing a multiple of 5.9x times 2008 projected EBITDA (FV/EBITDA ratio) for AlphaVille, indicating a 41.6% discount in relation to Gafisa´s multiple (IBES consensus). The company expects the transaction close in late December (based on September balance sheet calculations).

AlphaVille has all the attributes we are looking for in a strategic alliance said Rodrigo Osmo, Business Development Director of Gafisa. It is uniquely positioned in an attractive market, has a business complimentary to Gafisas, is professionally managed and has a cultural fit with our company. There are not that many companies in the real estate market that fit this profile. We are actively looking for those few that would have a synergic fit with Gafisa.

"We have carefully considered who would be best suited to accelerate our strategic growth and expansion plans and, because of its professional management team and strong corporate governance, Gafisa was the ideal choice to bring AlphaVille operations to the next level.", said Nuno Luis de Carvalho Alves, Chief Executive Officer of AlphaVille. "I'm honored to continue to lead AlphaVille as a subsidiary of Gafisa and intend to use our extensive market knowledge to build upon the success we have enjoyed for more than 30 years."

"We are thrilled to be joining forces with one of the Brazil's leading homebuilders. The potential for growth in the residential segment is immense. With Gafisa's reputation, professionalism and resources behind us there is no limit to what we can accomplish in the years ahead." affirmed Mr. Alves.

More detail about AlphaVille and Gafisas acquisition of the company can be found in the accompanying fact sheet.

About Gafisa

Gafisa is one of Brazils leading homebuilding companies, focusing on residential markets. Over the last 50 years, the company has been recognized as one of the foremost professionally-managed homebuilders, having completed and sold more than 900 developments and constructed nearly ten million square meters, believed to be more than any other residential development company in Brazil. Gafisa is one of the best-known brands in the real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners and competitors for quality, consistency and professionalism.

About AlphaVille

AlphaVille is the largest and only nationwide community development company in Brazil. It is focused on the identification, development and sale of high quality residential communities targeted at upper and upper-middle class families in the outskirts of metropolitan regions throughout Brazil. The first AlphaVille community was developed as new model of residential community in 1973 in city of Barueri, metropolitan area of São Paulo. Since then, AlphaVilles portfolio of communities has grown significantly, spread out over 16 states and 35 cities. The brand AlphaVille has become widely recognized as an innovative urbanistic concept synonym to a differentiated lifestyle.

AlphaVille Transaction Conference Call

Date: Wednesday, October 3, 2006

- In Portuguese

9:00 a.m. US ET
10:00 a.m. Brasilia Time
Phone: +55 (11) 2101-4848
Code: Gafisa
 

- In English

11:00a.m US ET
12:00a.m Brasilia Time
Phone: +1 (973) 935-8757
Code: 7947080

Transaction Highlights

  • AlphaVille is the largest and only nationwide community development company in Brazil, with no major competitors to date. It is focused on the identification, development and sale of high quality residential communities (lots) targeted at upper and upper-middle class families in the outskirts of metropolitan regions throughout Brazil.
  • AlphaVille differentiates itself from any potential competitor by its strong brand recognition, seasoned management team, unparallel land bank, market expertise and financial soundness.
  • We expect both companies to benefit from future synergies, including: (1) cross-selling opportunities of Gafisas residential buildings in AlphaVilles lots; (2) utilization of AlphaVilles wide experience with local authorities and business partners in over 35 cities in 16 states to further accelerate Gafisas geographical expansion; (3) AlphaVille will greatly benefit from Gafisas financial expertise, allowing it to optimize its capital structure and provide customers with better products
  • The residential communities segment, which currently account for only 10% of Gafisas launches, presents higher margins and lower cash exposure than that of residential buildings, where Gafisa concentrates most of its sales. The transaction will thus improve Gafisas economics and enable the company to further accelerate its growth.
  • Gafisa will initially acquire 60% of the shares for R$201.7 million; acquiring the remaining 40% over the next five years. The implied valuation of AlphaVille at the acquisition price is R$383.5 million representing a multiple of 5.9x times 2008 projected earnings (PE ratio) for AlphaVille, indicating a 41.6% discount in relation to Gafisa´s multiple1.(IBES consensus)
  • The initial 60% will be paid R$20 million in cash and the remaining R$181.7 million in Gafisas shares, allowing Gafisa to keep its conservative leverage policy. The other 40% will be paid over five years in cash or shares, at Gafisas sole discretion, providing Gafisa with enough flexibility to optimize its capital structure going forward.
  • With a professional management team and well-documented processes, AlphaVilles will continue its superior execution capabilities will remain with the company after the transaction is complete. Furthermore, in order to ensure that managements interest are aligned with those of Gafisa, AlphaVilles current CEO, Mr. Nuno Luis de Carvalho Lopes Alves will continue to lead this new subsidiary of Gafisa and wil retain 15% of AlphaVille going forward.

Transaction Rationale

We believe there is a tremendous potential for both companies operating together. The main reasons for the transaction are:

1. Superior business model with outstanding economics: AlphaVille has an economically-attractive business with high margins compared to those of Gafisa and little cash exposure. An average AlphaVille project has EBITDA margin on the high 20s and a maximum cash exposure of approximately 13% of a project total sale, thus resulting in lower capital needs to finance growth.

2. Leadership position: With no comparable competitor to date, AlphaVille is the uncontested leader in the residential community segment.

3. Proven track record: Over the past years, the AlphaVille concept has been highly accepted throughout the country, with a presence in 35 cities and 16 states. It has a solid history of strong sales performance in the very beginning of project launches. For example, AlphaVille Natal was 100% sold in 16 hours, AlphaVille Manaus 100% sold in one day, and AlphaVille Lagoa dos Ingleses (Minas Gerais) was 70% sold in the first day of launch. Its strong brand recognition and nationwide presence clearly position AlphaVille as the market leader with no comparable competitor.

4. Strong brand: A recognized high-quality infrastructure (as a result of specialized product design to upper and upper-middle class families and strict quality processes), high-quality after-sale customer service, and efforts to create a strong sense of loyalty and community between its clients are among the characteristics that the that AlphaVille brand carries within its target markets. This strong brand allows it to charge a premium over its competitors in every market it competes.

5. High growth with relatively low risk: AlphaVille has a sizable and virtually non-replicable land bank with potential sales of R$2.0 billion. This will foster future growth in the upcoming years with relatively low risk. Between 2006 and 2010 the Company expects to launch 46 developments, of which 42 are already in the land bank (including phasing of larger developments).

6. High entry barriers: The residential community the segment is characterized by a long approval process for new developments, which takes an average of three years (compared to Gafisas six months from land prospecting to project launch), involving interactions with Federal, State and Municipal authorities. We believe it is unlikely that any competitor would be able to replicate AlphaVilles current position and strength in the near future. The Company differentiates itself from any potential competitor by its solid land bank, strong brand recognition, market expertise and ability to attract and negotiate partnerships with landowners without increasing its cash exposure.

7. Synergies and cross selling opportunities: Gafisa will benefit from cross-selling opportunities with AlphaVille by bringing its expertise in the development of residential, commercial and condominiums buildings. Some AlphaVilles already have high-rise building complexes. In late September, Gafisa and OAS launched their first project under the partnership inside an AlphaVille Community in the City of Salvador. With 49% of the units sold in the first week of launching, Gafisa believes that the AlphaVille franchise was one of the reasons for the pre-sales success. Upon consummation of the transaction both companies are positioned to immediately capitalize on such synergies and efficiencies moving forward.

8. Attractive valuation: Our proposal for 60% of the Company implies an entry multiple of 5.9x FV/EBITDA 2008E, which represent a discount of 41.6% over Gafisas current trading multiples (stock price @R$28.05). This multiple was calculated based on Analysts Consensus (average) Estimates of Earnings for 2008.

The Company

AlphaVille is the largest and only nationwide community development company in Brazil, with no major competitors to date. It is focused on the identification, development and sale of high quality residential communities (lots) targeted at upper and upper-middle class families in the outskirts of metropolitan regions throughout Brazil.

The first AlphaVille community was developed as the new model of residential community in 1973 in city of Barueri, metropolitan area of São Paulo. Since then, AlphaVilles portfolio of communities has grown significantly, spread out over 35 cities and 16 states.

Some of AlphaVille Developments

The Company has a successful track record and over the years. The AlphaVille concept has been very well accepted throughout the country with several of its projects being fully sold in less than two months. Its strong brand recognition and nationwide presence clearly position AlphaVille as the market leader with no comparable competitor.

AlphaVille is recognized for its high-quality infrastructure (as a result of specialized product designed with strict quality processes for upper and upper-middle class families and strict quality processes), high quality after-sale customer service and efforts to create a strong sense of loyalty and community between its clients. Those and other factor led to the distinguished share of mind that the AlphaVille brand carries within its target markets. This strong brand allows it to charge a premium of 20-40% over its competitors in every market it competes.

Gafisa and AlphaVille Nationwide Presence

The development of an AlphaVille residential community consists of transforming large rural acreage into urbanized lots, developing all required infrastructure (water, sewage, electricity, roads), as well as facilities such as a sports club, high-rise monitored fences, etc.

AlphaVille has developed its business model in the form of specific partnership agreements with land owners, who share part of the revenues of each project. Partnering with land owners is clearly one of the core competences of AlphaVilles management, resulting in lower cash exposure in each project.

AlphaVilles Development Process

AlphaVille has a sizeable and virtually non-replicable land bank of approximately R$2.0 billion of future sales, supporting the Companys growth over the next seven years with relatively low risk. AlphaVille has a proven track record and strong expertise in a segment that is characterized by a long approval process, which takes on average 3 years (compared to Gafisas six months from land prospecting to project launch). We believe it is unlikely that any competitor would be able to replicate AlphaVille current position and strength in the near future. AlphaVille is unique in its ability to attract and negotiate partnerships with landowners without increasing its cash exposure.

Table A - AlphaVilles Land Bank (AlphaVilles stake of the projects)

Region

Usable Area (sq.m)

Potential Units Future Sales (R$000) % of acquired through swap agreement
Southeast 4,926,325  9,213  1,138,151  93%
Northeast 2,626,057  3,461  566,646  100%
South 746,533  1,430  155,278  100%
Mid-West 502,757  926  104,954  27%
North 162,121  438  32,424  100%
Total 8,963,794  15,467  1,997,452  92%

Financing the Transaction

The transaction involves the purchase of 100% of its shares for cash and stock divided in 3 phases as described below:

Phase 1 acquisition of 60% of AlphaVille shares for R$20 million cash at the date of the closing; and issuance of 6,477,718 new Gafisas shares @R$28.05 valued at approximately R$181.7 million to current AlphaVille shareholders;

Phase 2 acquisition of 20% of AlphaVille shares in exchange for cash or Gafisas shares (at Gafisas discretion) 36 months after the closing of the transaction;

Phase 3 acquisition of the remaining 20% of AlphaVille shares in exchange for cash or Gafisas shares (at Gafisas discretion) 60 months after the closing of the transaction;

The price of the new shares issued was calculated based on the average closing price of Gafisas stock from the 20thto the 5th day prior to the signing of the transaction.

The AlphaVille share price for the second and third phases will be calculated based on valuation to be done by an independent institution based on the Discounted Cash Flow Method.

AlphaVille shareholders are expected to own approximately 5.9% of Gafisa after the 1st phase of the transaction.

The new shareholders might be able to sell 50% of the issued shares in the first phase after six months of the closing of the transaction. The remaining shares of the first phase might be sold 18 months after the closing of the transaction or after March 2008, whatever happens first.

Our proposal of R$201.7 million for 60% of the Company implies an equity value of R$336.2 million, and, after taking into account the companys net debt, an enterprise value of R$383.5 million. These figures indicate an entry multiple of 5.9x FV/EBITDA 2008E and 7.6x P/E 2008E, which represent a discount of 41.6% and 42.2%, respectively, over Gafisas current trading multiples (stock price @R$28.05). These multiples were calculated based on Analysts Consensus (average) Estimates of EBITDA and Earnings for 2008.

Table B Multiples Analysis

Multiple Analysis    
 
Gafisa's Financials as of June 30th 2006(R$ mm)    
# shares (mm) 102,6 
Minority Interest 0,0 
Net Debt (Net Cash) (147,0)
Enterprise Value (EV) 2.744,1 
 
EBITDA 2008E (1) 271.3 
Earnings 2008E (1)   218.4 

Note (1): Based on Analysts Consensus Estimates (Deutsche Bank, Itau, Merrill Lynch, UBS)

 
EV / EBITDA    
Transaction EV / EBITDA 2008E 5.9x
Gafisa's EV / EBITDA 2008E 10.1x

Discount over Gafisa´s Multiple (2)

41.6%
 
P / E    
Transaction P/E 2008E 7.6x
Gafisa's P/E 2008E 13.2x
Discount over Gafisa´s Multiple (2) 42.2%
 
Note (2): Based on Gafisa's stock price of R$28.05

After completion of the acquisition, Gafisa will incorporate AlphaVilles debt amounting to R$ 53.5million (R$46million classified as long-term debt).

Governance at AlphaVille

AlphaVille will operate as s subsidiary of Gafisa, working as if it were a stand-alone company and retaining its offices and staff at Barueri, a metropolitan area of São Paulo. Under the terms of the sale, AlphaVilles Board of Directors will be composed by five members of whom three will be appointed by Gafisa.

AlphaVilles current CEO and Chairman, Mr. Nuno Luis de Carvalho Lopes Alves and Mr. Renato Albuquerque will be kept in charge and will retain 40% of AlphaVille going forward aligning Gafisas interests of further developing AlphaVille and capturing its growth potential. Mr. Lopes Alves who has been leading the company for nine years will remain as CEO of AlphaVille, operating now as a subsidiary of Gafisa. After the transaction, Mr. Alves will own approximately 15% of AlphaVilles outstanding shares. Mr. Albuquerque, AlphaVilles Chairman, will own approximately 25% of AlphaVille outstanding shares. Gafisa will seek shareholder approval for the appointment of Mr. Albuquerque as a Board Member of Gafisa.

Renato de Albuquerque. Graduated in enginnering and architecture, Mr. Albuquerque founded Construtora Albuquerque, Takaoka S.A., with Yojiro Takaoka in 1951. In 1973 the Company launched Brazils first edge city: the pioneer AlphaVille in the city of Barueri, expanding to Santana de Parnaíba, metropolitan area of São Paulo. In 1995, Mr. Albuquerque founded AlphaVille Urbanismo S.A., with his partner Mr. Nuno Lopes Alves, improving the model and expanding the AlphaVille concept throughout Brazil, being currently present in 35 cities and 16 states.

Nuno Luís de Carvalho Lopes Alves. Born in Portugal, Nuno Lopes Alves graduated in Law in Brasil in 1979. Mr. Lopes Alves returned to Portugal to form the real estate concern, Somalfa. With Mr. Albuquerques invitation to establish AlphaVille Urbanismo, Mr. Lopes Alves returns to Brazil with the mission of expanding AlphaVilles operation.

Selected Historical Operating Information

The table below sets forth some operating indicators of both companies for illustrative purposes:

Table C Selected Operating and Financial Data

(R$ million, except when indicated) Gafisa AlphaVille Gafisa + AlphaVille

2003A 2004A 2005A 2003A 2004A 2005A 2003A 2004A 2005A
 
Number of Launches 20  11  21  23  15  25 
Launches (R$ '000) 377.356  206.942  651.815  57.415  141.521  176.492  434.771  348.463  828.307 
Usable Launched Area (m2) 179.437  133.393  514.068  656.720  1.151.898  1.170.096  836.157  1.285.291  1.684.164 
Price per sq.m (1) 2.701,0  2.725,0  2.768,0  146,6  200,2  263,7  na na na
Number of Units 1790  1132  2446  687  1089  1555  2477  2221  4001 
                   
Net Revenues (2) 439,613  465,837  493,895  90,334  na na 587,870 
EBITDA (2) 83,876  65,745  65,279  23,216  na na 88,492 
EBITDA Margin   13% 26% na na 15%
Note: (1) Price per sq.m for Gafisa excludes lots

(2) Numbers for AlphaVille are pro-forma, unaudited and not according to BR GAAP

Timetable

The closing of the transaction is subject to customary conditions precedent, including any required regulatory approvals. Gafisa will submit the ratification of the transaction to its shareholders in accordance with article 256 of Brazilian Corporate Law. The regulatory and creditor approval process is expected to be completed in approximately 60 days after the Shareholder Meeting. Therefore, the Company expects to close the transaction in late December.

Outlook

As the Company expects to close the transaction in late December, the combination of Gafisa and AlphaVille is not likely to affect our operating results for fiscal 2006. Guidance of launches and EBITDA margin of Gafisa, including the AlphaVille acquisition will be announced as soon as the transaction is closed.

About Gafisa

We are one of Brazils leading homebuilding companies, focusing on residential markets. Over the last 50 years, we have been recognized as one of the foremost professionally-managed homebuilders, having completed and sold more than 900 developments and constructed nearly ten million square meters, which we believe is more than any other residential development company in Brazil. We believe "Gafisa" is one of the best-known brands in the real estate development market, enjoying a reputation among potential homebuyers, brokers, lenders, landowners and competitors for quality, consistency and professionalism.

About AlphaVille

AlphaVille is the largest and only nationwide community development company in Brazil. It is focused on the identification, development and sale of high quality residential communities targeted at upper and upper-middle class families in the outskirts of metropolitan regions throughout Brazil. The first AlphaVille community was developed as new model of residential community in 1973 in city of Barueri, metropolitan area of São Paulo. Since then, AlphaVilles portfolio of communities has grown significantly spread out over 35 cities and 16 states. The brand AlphaVille has become widely recognized as an innovative urbanistic concept synonym to a differentiated lifestyle.

This release contains forward-looking statements relating to the prospects of the business, estimates for operating and financial results, and those related to growth prospects of Gafisa. These are merely projections and, as such, are based exclusively on the expectations of management concerning the future of the business and its continued access to capital to fund the Companys business plan. Such forward-looking statements depend, substantially, on changes in market conditions, government regulations, competitive pressures, the performance of the Brazilian economy and the industry, among other factors, therefore, they are subject to change without prior notice.

1 Price @R$28.05 For more details, see Financing the Acquisition Section of this report.

Contacts

Gafisa S.A.
Gustavo Felizzola (Investors), +55 (11) 3025-9242
ir@gafisa.com.br
www.gafisa.com.br/ir
or
Maquina da Noticia
Mariane Corazza (Media), +55 (11) 3147-7900
mariane@maquina.inf.br
or
Reputation Partners
Eileen Boyce, 312-222-9126
eileen@reputationpartners.com

Sharing

Contacts

Gafisa S.A.
Gustavo Felizzola (Investors), +55 (11) 3025-9242
ir@gafisa.com.br
www.gafisa.com.br/ir
or
Maquina da Noticia
Mariane Corazza (Media), +55 (11) 3147-7900
mariane@maquina.inf.br
or
Reputation Partners
Eileen Boyce, 312-222-9126
eileen@reputationpartners.com