Brazil’s Stone looks to follow PagSeguro in snubbing B3


Rob Dwyer
Published on:

NYSE too strong a lure for tech companies; Latin America needs ‘IPO catch-up’.


The success of Brazil’s PagSeguro’s recent IPO on the NYSE has led its competitor, Stone, to draw up plans to launch on the US stock exchange this year, according to market sources.

PagSeguro, which provides online and in-store payment services, raised $2.3 billion in January this year. This general rarity of technology company IPOs from Brazilian companies helped the IPO launch above its pricing range and the stock traded up 33% on its first day of trading.

If Stone follows PagSeguro to the NYSE, it will be bad news for Brazilian exchange B3, which is trying to attract other Brazilian tech companies to list locally. That could then become a strategic issue for investors looking for onshore Brazilian investments.

Stephen Dover, head of equity for Franklin Templeton, says he believes Latin America is falling in relative importance in his firm’s emerging market investment allocation because of his firm’s focus on EM technology.

“There are not enough technology companies or innovative companies listed in Brazil,” he says.

He adds that B3’s skew to commodity stocks is a problem for international investors because the exchange is not representative of the country’s real economy.

He says index funds do not match the potential upside to the country’s future economic growth, and that means that investors pursuing stock-picking strategies in certain sectors, such as consumer-orientated companies, face challenging valuations.

However, Dover does confirm the consensus view among Latin American equity capital markets bankers that the markets are very receptive to Latin American IPOs and political uncertainty in the region is not an obstacle.

“We would absolutely look at IPO stories in the first half of this year,” he says. “We are long-term investor, and there is an IPO deficit in the region – there is a lot of catch-up that needs to be done in Latin America.”


Senior equity capital markets bankers are confident that the rebound in issuance seen last year will continue despite recent market volatility that saw some IPO deals pulled from the market.

Despite a failure to pull off IPO deals for companies such as Argentine agribusiness Bioceres and Brazilian pharmaceutical Blau in mid February, bankers say that once volatility in the US equity exchanges abates, the next two quarters should see a steady stream of issuance.

That favourable outlook is forecast to last until the second half of 2018, when potential local volatility caused by the region’s busy electoral programme could depress activity.

“I don’t think we will see the same volume of deals this year as we did in 2017 as last year’s transactions included a portion that were trying to front-run this year’s elections,” says Augusto Urmeneta, head of Latin America investment banking at Bank of America Merrill Lynch in New York. 

“We saw a very busy fourth quarter from Brazilian companies, both in ECM and DCM and this was one of the key reasons. However, the deals we have done this year have been well received. When the conditions stabilize, we think investors will be receptive to more deals – especially from Brazil and Argentina.”

ECM bankers in New York, Buenos Aires and São Paulo are generally upbeat after the end of the drought of equity market issuance seen in 2015 and 2016. The severe recessions in Brazil and Argentina meant that combined equity issuance for the region in these years was just $22.9 billion, according to Dealogic.

In 2017, the region issued $27.3 billion; this year, $4 billion had been issued by early February.

Brazil’s return to the market is the driver: in 2017, the country issued 41 deals worth $15.3 billion, equal to a 56.1% share of all Latin American equity issues.

Argentina has also become a feature of the market again. In 2017, the country issued 11 deals worth $4.3 billion and came in third in the share of the regional volumes with 15.7%. Mexico was second with 15 deals worth $5.6 billion and a 20.4% share.

“Investors started looking aggressively at the region again towards the end of 2016, and we saw the rebirth of the market throughout 2017,” says Marcio Souza, head of equities for Latin America at Santander in New York. “We saw a large pool of money coming in to finance both companies that were looking to restructure as well as for those looking for capital to finance another level of growth.”

Bankers report a large pipeline of relatively small Argentine transactions and a more varied mix of deal sizes from Brazil. The Brazilian government’s failure to pass pension reform has put even greater pressure on the privatization of utility Eletrobras. 

A successful privatization of this company would not only raise a large amount of capital to finance the state’s fiscal deficit but would also raise expectations of a potential steady stream of privatizations under the next government.

“There is a lot of pent-up demand [from companies wanting to issue IPOs]”, says Alessandro Zema, head of investment banking Brazil at Morgan Stanley. 

“Over the next three to four years we could expect to see a lot of deals, although it is a question whether the market will continue to be open during that period. But certainly in the first half of this year, the market will still be very welcoming to new companies.”