THE SENIOR PORTUGUESE banker rails at fate. "It’s just so unfair," he groans, echoing what many in the market must be feeling. "Just when our economy has finally got its house is order and is in a great position to really take advantage of growth in Spain and Europe the opportunities in these economies are starting to look less bright."
Indeed, the small size of Portugal’s domestic market and its dependence on international trade, particularly with Spain and the rest of the EU, leaves its economy particularly exposed to global rather than domestic economic factors. Although this is sometimes a blessing, it is proving to be more of a handicap this time around.
After a stellar performance in 2007, in which the main index of Portuguese stocks, the PSI 20, posted a total return of 19.8%, substantially outperforming the EuroStoxx index, which offered only 8%, the PSI 20 has already given up most of last year’s gains, falling 13% since the start of the year.
"The performance of the stock market indices are more closely correlated with foreign and particularly Eurozone macroeconomic trends than the specific environment in Portugal," says Pedro Pintassilgo, head of Portuguese equities at F&C Investments in Lisbon. "The Portuguese economy is in an upward trend, growing about 2%, but what we’ve seen so far this year, however, is that the market has been following what the main European markets have been doing, falling by a very similar amount."
In fact, the PSI 20 has outperformed the Eurostoxx index consistently over the past three, five and 10 years despite the fact that GDP growth in Portugal has been below the eurozone average. This is because the PSI 20 includes several large companies that have had successful international strategies and that have been growing much faster than the Portuguese economy as a whole, in which small and medium-sized companies dominate.
The small size of the market and the prevalence of small caps haven’t helped. "It’s only natural that a small market with low liquidity and lots of small caps should get penalized in the current environment, where small caps are generally out of favour," says Pintassilgo.
However, 2007’s strong gains were by no means even across the board as a couple of companies offered truly impressive returns. Construction and engineering company Soares da Costa soared 200% and joined the PSI 20; Galp, an oil and gas company, rose 164%.
Failed M&A strategies were responsible for some of the worst share price performances. Banco BPI’s market capitalization has more than halved since three bids involving Millennium BCP fell through. Millennium BCP, which has been suffering a protracted management feud and is now the subject of regulatory investigations has seen its share price fall 41%.
Sonaecom, Portugal’s third-largest mobile phone operator, suffered share price falls of 30% after its audacious bid for Portugal Telecom, the industry incumbent and second-largest company in the PSI 20, collapsed, leaving it with few options and in need of a new growth strategy.
The strong overall performance of the market attracted some significant IPOs, not only from the government’s privatization programme but also from fast-growing private sector companies.
Martifer, a conglomerate with interests in steel construction, warehousing, energy equipment, advanced fuels and electricity generation, raised €200 million in its IPO in June 2007, with a significant portion from retail investors, and set an example that bankers hoped would encourage other private companies to join the market.
One of the fastest-growing companies in Europe, Martifer, which is run by two brothers, Carlos and Jorge Martins, decided to turn to the market to raise new capital in order to fund the purchase of German wind turbine manufacturer Repower Systems. Martifer moved to take control over the German company, in which it had already been a significant investor, when French nuclear power company Areva launched an unexpected bid. Martifer helped in its bid for the company by partnering with Suzlon Energy, an Indian wind turbine maker.
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PSI gives back its gains |
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Portugal returns to 2007 levels |
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Source: NYSE Euronext, Dow Jones EuroStoxx |
Retail investors have played an important role in Portuguese IPOs since interest was rekindled by the privatization of Galp Energía in October 2006. When the state sold off most of its 30% stake, as many as 200,000 investors, about 3% of the adult population, subscribed, contributing more than 40% of the €1.1 billion raised.
Retail investors contributed most of the demand in the July 2007 IPO of Redes Energéticas Nacionais, the national electricity and gas grid operator. According to bookrunners, 62.5% of the €350 million raised went to retail investors. The deal, which priced at the top of its range, was, unusually, almost entirely a Portuguese affair, with only 25% of the shares going to foreign institutional investors.
Although the success of 2007’s deals initially encouraged several private companies in Portugal, including conglomerate Visabeira, to consider a stock market listing, current market conditions are proving to be a turn-off.
"After the success of Martifer, a number of other companies started to consider a listing," says Jorge Freire Cardo, head of corporate finance and equity capital markets at Caixa Banco Investimento, a leading Portuguese investment bank. "But with the current market turmoil, smaller companies that were waiting now find that they will have to wait for some time more until market conditions calm down. It’s a lot harder for smaller companies to get investors’ attention in a market like this."
Although smaller companies might be rightly cautious, some larger ones are feeling brave. EDP, the Portuguese power utility, is keen to press ahead with the spin-off of its renewables business, EDP Renováveis, which could price in the first half of the year and raise as much as €2.5 billion. If the deal reaches €2.5 billion, EDP Renováveis would be the largest ECM transaction ever from Portugal, beating EDP’s €2.2 billion euro tranche in 2000 and by far the largest ever IPO.