April 17, 2013 12:44 pm

Brazilian IPOs poised for comeback

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In Brazilian capital markets, an old rock star has been threatening to make a comeback this year: the initial public offering.

After nearly a two-year absence, in which the number of IPOs could be counted on one hand, more Brazilian companies are daring to announce their intention to go public. This is in spite of a tumultuous year so far for the benchmark Bovespa index and an international environment that is little better.

The market is so tough that one issuer, Biosev, the Brazilian sugar and ethanol unit of international commodities trader Louis Dreyfus, took the unusual step of offering a money-back guarantee to investors to get its second attempt at an IPO through this week. It was successful, with the company raising as much as R$814m ($407m).

Others in line for offerings include Banco do Brasil, which is planning a R$6bn listing of its insurance arm. Although suspended for 30 days because of irregularities relating to Banco do Brasil’s efforts to publicise the IPO, it is still expected to go ahead. Then there is Gol, Brazil’s second-largest airline by sales, which wants to take its Smiles frequent flyer programme public, and Votorantim Cimentos, a cement company.

“The IPO pipeline announced would make Brazil one of the top issuers in the globe this year if it is realised,” says Pedro Bastos, chief executive of HSBC Asset Management in São Paulo. “The Banco do Brasil transaction alone will really move the needle.”

Brazilian companies last year raised the lowest amount of money through share sales since 2005, at $7.6bn. It was a long way off the boom year of 2010 when they sold nearly $50bn of shares, and it was the first year since 2003 that Mexican companies raised more than their Brazilian counterparts – $9bn in total. The difficult market limited the number of Brazilian IPOs to just three, raising a total of just over $2bn. BTG Pactual, the homegrown investment bank, accounted for the bulk of this, selling $1.73bn of shares in itself.

This year the number of share offerings has increased, with Brazilian companies raising $3bn in the first quarter, or 10 times more than a year earlier. But again, Mexican issuers led the region with $4.4bn of deals during the quarter, according to Dealogic. Brazil’s fundraising has included only two IPOs, according to Bloomberg data, the $265m offering of Linx, a software company, which priced near the top of its range, and another small listing by technology company Senior Solution, which priced below its expected range.


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“The market is still tight. It’s only open to those who can differentiate themselves and offer something that will generate real value,” says Fabio Matsui at Cypress, a boutique investment bank in São Paulo.

The difficult conditions are shown by the Bovespa, which was down 14.7 per cent this year at 53,990.83 points, with sentiment battered by concerns over weaker than expected Chinese and US economic growth. Investors are also worried about Brazil’s prospects, with gross domestic product expanding less than 1 per cent last year even as inflation moved towards the top of the central bank’s target range of 4.5 per cent plus or minus 2 percentage points. The central bank was expected to start a new tightening cycle either at a policy meeting late on Wednesday or in the coming weeks, ending a period of record low interest rates.

“Policy makers are under pressure to prove they have not gone soft on inflation, and we suspect this will result in a rate hike this month,” says London research house Capital Economics in a note.

The weakness in the Bovespa has also stemmed from domestic factors. The downturn in the commodities cycle and softer global outlook for petrol prices has weighed on index heavyweights Vale, the world’s largest iron ore producer, and Petrobras, the national oil company. Vale has also had to contend with a prolonged $15.5bn legal dispute in which the government is claiming taxes on its foreign earnings.

In the market’s favour, on the other hand, is that stocks are trading at 10.4 times 12-month forward estimated earnings – in the middle of the range for the past five years.

“We do have today something that we didn’t have before, which is a very attractive valuation,” says HSBC’s Mr Bastos.

In this environment, those companies that price well and have something out of the ordinary to offer could still get their IPOs away, bankers say. And not all of them will have to resort to providing a guaranteed return as Biosev did, with its offer of a put option that allows investors to sell their shares back to Louis Dreyfus at the offering price with interest in 15 months if the deal disappoints.

Banco do Brasil’s offering of BB Seguridade Participacoes could be attractive because insurance is still seen as a growth industry in Brazil, tapping into the booming middle-class story. The success of Gol’s offer of its Smiles unit, another consumer-driven business, will depend on the financials of the company, bankers say. Details of Votorantim Cimentos’s proposed IPO have not been officially announced.

“There’s always demand in any situation as long as the offer is attractive,” says Cypress’s Mr Matsui.

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