Brazil’s equities market suffers an identity crisis
Rest of region outpaces traditional leader; Poor IPO performance blamed
This year Brazil will struggle to take back the dominance of Latin American equity transactions it lost in 2011, according to data and bankers.
Last year, there were 51 deals in Latin America, worth $28 billion, of which 23 deals came from Brazil worth $10.5 billion – the first year for more than a decade that the rest of the region has generated more deals and volumes, as well as generally better pricing and post-execution performance. ECM bankers have reported to Euromoney confidentially that several transactions are ready to come to market if conditions appear favourable – with IPOs from a Colombian and a Peruvian company known to be preparing for the end of January or early February. Others are also likely to be considering listing or conducting follow-on transactions.
Meanwhile, in Brazil, where the pipeline is more transparent due to regulatory filing requirements with the local CVM, there are just two new filings – Brazilian travel agent Brasil Travel and Seabras Serviços de Petróleo, a Brazilian unit of Norway’s Seadrill – ready to tap the markets in early 2012.
The poor performance of the Brazilian IPO class of 2011 is one reason there is little momentum entering 2012. Of the 11 deals, only five are trading above their list price, although when judged against the Bovespa benchmark – which fell nearly 20% last year, one of the world’s worst-performing stock exchanges – seven of the 11 are above their net listing.
Some bankers complain that the Brazilian stock exchange is struggling with an identity crisis – happy to be based in a strong investment-grade economy that attracts global inflows reflecting this relative economic maturity, while trying to price new deals at multiples seen in the most emerging of markets.
"There is a disconnection, which is why equities as an asset class in Brazil has not been the top choice within emerging markets for almost a year," says one New York ECM professional.
Marcelo Millen, the director responsible for ECM at the investment banking division of Credit Suisse in Brazil, says he "partially agrees" with this view that Brazilian equities are an asset class in the middle of an identity crisis. "The result of the economic growth of the past four or five years is that Brazilian companies are trying to achieve the same multiples as Chinese and Indian companies, [while] the international investors, which account for about 50% to 60% of these equity offerings, are trying to price the transactions at lower valuations and lower multiples," says Millen.
He says it is up to the bankers, such as him, "to have the pricing conversation with companies here in Brazil before launching the roadshow to try to bring them down to earth and make sure they understand the market momentum".
Millen says Credit Suisse, which was left-lead on eight of the 2011 IPOs, has the best record among the investment banks in Brazil in pricing IPOs within the proposed price range.
"The Latin American-dedicated funds are overweight in Brazil equities, so to buy a new IPO they need to sell a name. That means they have a second analysis to do"
Meanwhile, Facundo Vazquez, managing director in Latin America ECM for Bank of America Merrill Lynch in New York, points to a structural problem in the buy side of these deals that is weakening demand and therefore lowering pricing. "The Latin American-dedicated funds are overweight in Brazil equities, so to buy a new IPO they need to sell a name within their portfolio," says Vazquez. "That means they have a second analysis to do – not only on the performance of the IPO and metrics and valuations, but also they have to make another decision, which is effectively to sell something in the portfolio they have probably held for a long period of time and know very well. "That dynamic is not happening outside Brazil. Most Latin American investors are underweight ex-Brazil – there haven’t been many huge liquid transactions from these countries – and so they are willing to increase exposure to some of these countries without having to go to the second phase of the decision-making process."
No Brazilian company has listed since July 21 last year, when Abril Educação sold R$428 million ($232 million). Some question if any Brazilian IPOs will happen in the first quarter of 2012, though Brazilian travel operator Brasil Travel Turismo e Participacões might test the water.
Brasil Travel, a holding company for 35 companies involved in businesses such as travel agencies, foreign exchange and travel insurance, has mandated Credit Suisse, Barclays and Flow Corretora to manage the IPO. The company is led by Paulo Castello Branco, a former vice-president of TAM Airlines, and chaired by co-founder and ex-BTG Pactual partner Pedro Guimaraes.
Credit Suisse’s Millen told Euromoney that the bank was about to assess the market to see if investors are keen to make new investment in Brazil. He is cautiously optimistic, saying: "At the beginning of each new year, there is an opportunity to bring new stories to the market since investors are deciding whether they are going to keep [their existing stocks] or go for new ones, so there is a good opportunity to bring new companies."
The Brasil Travel deal is expected to be worth between $400 million and $500 million, although the valuation and the deal structure are yet to be decided. "We have a chance to price a very interesting and compelling equity story due to scarcity value, and on top of that there is huge space for consolidation in the sector – and with consolidation the adoption of best practices, so it is a very good investment opportunity," says Millen.
He also points out that the company has exposure to countries in the rest of the region, which might help attract investors looking for some exposure outside Brazil, although the core sale will be based on Brazil and specifically the opportunities stemming from the Olympics and World Cup.
However, for Vazquez, the first quarter of 2012 will continue where 2011’s ex-Brazil story left off. "We know there is no pipeline coming out of Brazil for the first window [January/February] and there is going to be very limited activity," says Vazquez. "Only a couple of companies in Brazil have filed [with the CVM] and could technically be in a position to price a deal before February.
"The Brazilian pipeline could be weak for the first quarter, which is contrary to what is going to happen outside Brazil. I would say in the first quarter, or maybe second quarter, ex-Brazil is going to have significant volume."