The last couple of equity deals of 2013 from Brazil failed to change the bearish sentiment that has dogged the market for fresh equity for more than a year. Investment bankers will be hoping for an improvement in investors’ appetite for Brazilian equity in 2014, but with the World Cup and a presidential election this year there is little on which to build foundations of optimism. However, a report by global consultancy McKinsey offers hope that Brazilian and Latin American equity issuance will grow strongly, albeit in the longer term.
In December 2013 travel agency CVC Brasil managed to price its long-awaited IPO (the company initially filed to come to market in 2011), but it was yet another deal to launch below its R$18 to R$22 price range. The company had to settle for an initial price of R$16, selling 38.8 million secondary shares in a deal led by Bank of America Merrill Lynch, BTG Pactual, Itaú BBA, JPMorgan and Morgan Stanley that raised R$621 million ($236 million). The sale constituted about 30% of the company and was the exit strategy of US private equity firm Carlyle.
A week later, Via Varejo, a Brazilian retailer, also priced below its range of R$29.60 and R$33.60. This time the deal was a follow-on, but the retailer chose to sell through the range because it was the launch of the specific shares on offer – secondary units – and its common shares are illiquid. The shares priced at R$23 – a significant discount. The transaction raised $2.85 billion-equivalent compared with the target of around R$4 billion. Bank of America Merrill Lynch, Bradesco BBI and Credit Suisse managed the deal.
The Via Varejo transaction brought the total ECM issuance from Brazil to $13 billion, up from 2012’s disappointing total of $9.4 billion. The poor equity performance has been attributed to a range of factors, from disappointing GDP growth and increasing political risk to the currency’s volatility and, most recently, the withdrawal of capital from emerging markets.
However, the report by McKinsey offers succour to the equity capital market groups at investment banks in the region. The firm has researched the growth patterns of large corporations around the world and analysed the correlation between the development of cities and urbanization and isolated "city GDP growth" as a variable in a linear regression model to explain the location and revenue of the world’s emerging large companies (categorized as those with annual revenues of over $1 billion).
As well as predicting where the world’s large companies will emerge, and those that will require big amounts of equity investment during their rapid growth, McKinsey also reveals the level of fluidity in the ranks of the world’s largest companies. The report indicates that only 270 of the world’s largest companies in 1998 (the Fortune Global 500) were still on the list in 2012; 140 fell below the rising revenue threshold and another 90 left through merger, acquisition or bankruptcy. Projecting forward, the consultancy says that this state of flux will continue, with an additional 7,000 large companies expected to emerge by 2025 to add to those of the 8,000 large companies currently operating that survive.
The report’s authors, led by Richard Dobbs, director of the McKinsey Global Institute, say that China and Latin America are likely to be the top two locations for new companies. Latin America is predicted to be home to 800 of these new large companies, with new world cities such as Campinas and Recife in Brazil, Santo Domingo in the Dominican Republic and Tijuana in Mexico being the source of the rapid growth that propel these organizations onto the global scale. "Although Latin America’s regional economy is much smaller than China’s, it is further ahead than the People’s Republic in terms of urbanization and share of companies that are in the service sectors," says the report. "More than half of the Latin American population has been urban since 1979, while China did not pass this threshold until 2011; by then 63% of the Latin American population was living in cities."
Many of these new large companies will be the result of domestic and regional consolidation. Data from Dealogic show that Latin American companies are acquiring more companies outside the region, becoming multinational competitors. The totals are still smaller than inbound flows but given the current headwinds in terms of currency depreciation the momentum is substantial. More striking, however, is the growth of intra-regional M&A that overtook inbound M&A volumes in 2007 and now stands at almost twice the level of M&A capital that is entering the region from elsewhere.
Heather West, managing editor of Latin America for MergerMarket, says that, according to research by her company, 50% of all M&A in 2013 was domestic consolidation among Brazilian companies. West also says the phenomenon of internal consolidation is well established and is creating strong multi-Latina corporations.
"When speaking with M&A bankers they all say don’t underestimate the power of the multi-Latina," says West. "There are companies within Brazil, Mexico and Chile, for example, which are becoming more outbound, multinational powerhouses. JBS [a Brazilian meat producer] has been very active and they are already a global leader, and within Latin America you see companies like Falabella from Chile buying 50.1% of Brazilian retailer Dicico [in May 2013 for R$319 million] to give it access to the Brazilian home improvement company. There are a lot of companies trying to make headway within Latin America and we are seeing a lot of that kind of activity."