|Trucks in Brazil are loaded with sugar cane, which will be used in the production of ethanol|
The quirky nature of some Brazilian IPOs continues to provide interesting, if not successful, templates.
The R$814 million ($407 million) IPO from Biosev, the sugar and ethanol business of Louis Dreyfus Commodities, was dubbed the world’s first fixed-price IPO in April 2012. It sold put options alongside shares that enabled investors to sell back the shares they bought to Louis Dreyfus for the offer price plus inflation (R$16.57, with a sale price of R$15 on April 15 2013).
The lead bank coordinating the sale, BTG Pactual, also gave a 50% firm commitment to ensure the company, which had tried to sell an IPO a year earlier, could meet an internal obligation to conduct a public listing of at least 25% of the stock for at least $300 million.
Biosev’s IPO ultimately went ahead, without BTG needing to buy shares, but the options will expire on July 21 and, at nearly R$10 in-the-money, Louis Dreyfus is looking at repurchasing 90% of the shares it sold at IPO that were purchased with the option.
Sources close to the deal say that, should all the options be exercised, then Louis Dreyfus’s participation in the company would rise to 76.5% from 58%, and the free float would fall to 23.5%, below the Bovespa’s regulatory requirement for a minimum of 25%.
A source claims that Biosev has reached agreement from the Bovespa for a grace period of about six months in which to comply with the minimum free float requirement, but neither Biosev nor the Bovespa would confirm or deny any agreement, and it is not known if Biosev would have to conduct a formal follow-on to comply. There is no expectation that Louis Dreyfus would seek, or that the Bovespa would demand, a de-listing of the company.
A statement in response to written questions on the future of Biosev on behalf of Louis Dreyfus Commodities Holdings simply reads: “Adequate financial resources are available at the controlling shareholder’s level (within Louis Dreyfus Commodities Holdings) to buy the shares in the event of [the] put[s being] exercised by their holders. The controlling shareholder is keen to preserve and deepen Biosev’s access to the equity capital markets as a publicly listed company.”
In 2012 Biosev first approached the market with a proposed IPO but pulled the deal on the eve of pricing when the company was unable to satisfy a 2009 minority shareholders agreement, which stipulated the IPO must have a value of at least $300 million for 25% of the company. One investor who looked at the deal said the company was pitching the market a growth story to an industry that was consolidating after three bad harvests, a global slump in sugar prices and regulatory ceilings on gasoline prices from the Brazilian government. “There wasn’t much appetite,” he says. “Strategy-wise the company was talking expansion when the market was downsizing.”
If the IPO did not happen, the minority shareholders had the option to increase their holding in Biosev so majority owner Louis Dreyfus was under huge internal pressure to complete the listing amid terrible market conditions.
After discussions with BTG Pactual, which declined to speak to Euromoney for this article, Biosev added the bank to the IPO team as lead manager, alongside bookrunners Banco do Brasil Bradesco BBI, Itaú BBA and JPMorgan. Santander and Banco Votorantim were dropped. The company then returned to the market with a more conservative marketing message of using its existing capacity, rather than adding extra capacity, and added the firm commitment guarantee and options to bolster demand.
There is greater unease, however, at the bank’s repeated use of firm commitments in IPOs. BTG Pactual has offered, or reportedly explored the use of firm commitments, in other deals, notably CPFL Energias Renovaveis’s IPO, in which BTG Pactual provided a firm commitment to buy 56% of the IPO (coupled with a pledge from pension fund PREVI to buy about R$400 million). That commitment was to buy at the bottom of the R$12.51 and R$15.01 range and the deal was duly closed at the lower price, before trading down in the weeks following the sale, although the share price is now trading above its IPO price.Investors who bought without the options have seen their investments fall from R$15 to R$6.60 (as Euromoney went to press). Some ECM bankers away from the deal argue, with tongues in cheeks, that with 90% of the shares expected to return to the issuer, this deal should be viewed as a complex 15 month loan structure, rather than ECM issuance. However, there is little direct criticism of BTG Pactual’s role, as the use of options did enable Louis Dreyfus to satisfy its internal governance requirements and conduct an IPO at a very difficult time for the company, the industry and the country.
“The problem with firm commitments is that they instantly provide both a floor and a ceiling for the price,” says one senior capital markets banker. “No investor is going to buy above the level that the banks have committed to buy at, which takes away the objective of maximizing value during IPOs. The other objective is to create the best possible shareholder base for the company’s future expansion, and firm commitments fail on this count as well. Also, if there is any hint that an underwriter will be left with any of the shares the investors will fear an overhang in the secondary market, and stay well clear of the deal.”
Local DCM transactions are often structured using firm commitments, but even here the practice is changing and there is little expectation that there will be many other examples of ECM deals structured this way in Brazil.
“The fundamental difference between firm commitment for DCM and ECM is that banks are set up to own credit, so investors aren’t alarmed if they find out that a bank will be holding a portion of bonds. It’s not the same with ECM: banks aren’t supposed to be holders of equities, and so investors know that if it is possible that a bank will have a portion of an IPO they will be sellers in the market. Maybe not in a month, or even six months, but those shares will eventually come into the secondary and provide a downward pressure on price.”
A similar overhang has hampered the secondary trading of Biosev’s shares, as the presence of the options in the market has provided technical pressures to trading. “We have spoken to people who have just bought the puts (which have been trading independently of the shares since the IPO) because they have been thinking the shares will go down,” says one Biosev analyst. “In some ways, the market hasn’t been focused on the company’s operations and turnaround, and been looking more to the arbitrage opportunities, which is never good for shares. I think the [sale of options in the IPO] lowered liquidity and I don’t think anyone would buy the shares in the secondary market knowing that this put was in place. Investors are looking to see what is going to happen after July 21.”
There is value at the current share price on replacement value analysis alone, the analyst says. Also, the outlook for the industry is improving: whoever forms the new government after the elections in October and November is expected to raise gasoline prices and therefore be supportive of better pricing for ethanol. There are also predictions of a global sugar deficit for the first time in years, which could increase depressed sugar prices and boost the industry.
“People will start looking at sugar and ethanol again,” says the analyst. “That being said if investors are looking at the industry, there are other companies that have less risk and less leverage than Biosev that I think are more attractive.”