Hopes for equilibrium in Brazil’s IPO market
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Hopes for equilibrium in Brazil’s IPO market

Linx looked to for issuance kickoff; Large deal pipeline needs stimulus

Linx, a provider of software to the retail market, is likely to be the first company to try to launch an IPO in Brazil in 2013. The deal will be eagerly watched by all equity market participants: the market badly needs a successful first transaction to build momentum after a terrible year for IPOs in 2012. There is a reported backlog of at least 40 companies with serious IPO intentions and bankers say they have high hopes for a large volume of equity to be issued in the market, even if most say the second half of the year should be the more active.

Linx’s IPO would be the first in the country since furniture maker Unicasa priced a July deal below its expected range. Of the only other two IPOs last year, BTG Pactual managed to price in the middle of the range with its atypical transaction and car rental company Locamerica failed to hit its range.

The Brazilian IT company is targeting a pricing date of February 6 to sell 19.6 million shares (assuming a 15% greenshoe) at between R$23 and $27. At the mid-point of the range the company would raise R$490 million ($240 million) and the sale includes 6 million secondary shares going to a private equity fund with links to Itaú, one of the deal’s managers (the others are BTG Pactual, Credit Suisse and Morgan Stanley).

The deal ticks a number of boxes for investors: the company straddles the IT and retail sectors and therefore is exposed to the consumer story in Brazil, which is appealing. The company also plans to use the proceeds to invest in what it believes are strong growth prospects. The only superficial weakness – especially for international investors – is the small scale of the IPO.

"Size matters a lot – even more than the sector," says Fabio Nazari, head of equity capital markets at BTG Pactual, speaking to Euromoney before the announcement of the Linx IPO. "The sector needs to make sense but investors still like size."

However, Nazari thinks international investors will be attracted back to the Brazilian story, after being distracted by non-Latin American issuance in 2012. "Concerns about Brazil seem to be overdone and we could be running an upside risk. We still have a very strong pipeline from the last 24 months that didn’t hit the road, so with those two factors being considered I do believe we will see a very strong pipeline in 2013 and we will be able to put a lot of stories in the market."

Fernando Iunes, Itaú BBA’s global head
Fernando Iunes, Itaú BBA’s global head of investment banking

Fernando Iunes, Itaú BBA’s global head of investment banking, agrees that Brazil will recover its appeal to international investors, relative to the rest of the region. "In Brazil we have a new situation. We expect growth to resume this year and with reduced volatility from the global environment we will see an improvement in terms of risk perception."

Iunes also points to strong demand for Aliansce’s follow-on in December 2012 which, though small in scale at just $216 million-equivalent, attracted strong demand from international investors and attracted a more than four-times demand from more than 100 accounts. He also says smaller IPOs, such as Locamerica’s last year, have made money for investors (it was, as Euromoney went to press, trading at R$12 from a launch price of R$9) which should encourage investor appetite. Finally, there is the shift away from fixed-income investments by local investors as interest rates fall, which Iunes says will increase the demand for equity deals and increase the participation of domestic investors in Brazilian IPOs. "Domestic investor demand should be up. Some companies are paying 5% or 6% dividend yields, and with [Selic] of 7.5% the fixed-interest alternative is less compelling."

However, some believe that domestic investors are still wary about participating in IPOs.

"A lot of companies are ready and willing to go to the market in the beginning of 2013 but I don’t expect many in the first half," says João Albino Winkelmann, the head of Bradesco Private Bank, who has had many conversations with high-net-worth and ultra-high-net-worth clients about buying equities this year. "The reason is that some investors got very frustrated by what they have seen before: prices that are too high and no value left for the investors. The challenge here for the new companies that are planning to come to the market is to identify a reasonable price. It’s a real challenge for the investment banks."

Pressure in the system

With such low issuance in 2013 – Brazil managed only $7.6 billion in total volume from 28 deals, the lowest annual volume since 2005 and 32% lower than 2011 and just 15% of the total raised in 2010 – there remains a lot of pressure on investment banks in Brazil to book ECM fees, which in turn leads to valuation inflation in order to win mandates.

Many investors feel that until investment banks start pricing deals that have room for strong secondary market performance, issuance in the Brazilian IPO market will remain sporadic at best.

But Iunes rejects the idea that the banks are to blame: "You shouldn’t blame just one side," he says. "The problems in value perception are overstated and I think we will come to see a more mature market in 2013, with more equilibrium in terms of understanding the business case of the specific deals, which will in turn bridge the gap [between investors, and issuers’ valuations]."

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