Latin America Equity Issue
A mammoth undertaking: If the sheer size of Petrobras’s US$70bn follow-on was not enough, the largest-ever equity offering globally presented an army of investment banks with additional challenges not typically encountered. For its complexity, size and significance, Petrobras’s US$70bn follow-on offering is IFR’s Latin America Equity Issue of the Year.
Petrobras’s US$70bn follow-on offering can truly be characterised as a mission-critical financing, not only for the state-controlled oil company but also for Brazil itself. Coming ahead of presidential elections the trade was fraught with political risks and represented a unique confluence of socialism and capitalism, fuelling controversies over valuation and government influence.
The Brazilian government and related entities took down US$42.5bn of the deal as part of a priority rights offering of ordinary and preferred shares traded on the Bovespa; while US$23.5bn was allocated to public investors in the form of ADRs and non-voting preferred securities traded on the NYSE. In effect the placement involved four different classes of stock across two exchanges, giving priority rights holders the ability to arbitrage and/or short-sell in hope of covering on the deal.
“When you think about stabilising a deal like Petrobras there is a lot that goes into it,” said Paulo Mendes, head of ECM in Brazil for Morgan Stanley, the deal’s stabilisation agent and one of 15 bookrunners. “This was an extremely complicated and unique deal.”
The prominence and complexity of the transaction was evident in the fact that Petrobras hired Rothschild just to help navigate the underwriting syndicate. Bank of America Merrill Lynch, Bradesco BBI, Citigroup, Itau BBA, Morgan Stanley, Santander and Banco do Brasil (retail distribution) were named as global co-ordinators; BTG Pactual, Credit Agricole CIB, Credit Suisse, Goldman Sachs, HSBC, ICBC International, JP Morgan and Societe Generale joined as second-line joint bookrunners.
Controversy surrounding the deal extended to its very nature. It was designed to fund development of deepwater, pre-salt formations off the coast of Brazil. Early in the year, when the preliminary agreements were formalised, Petrobras announced plans to devote US$224bn to capital expenditure through the end of 2014.
Petrobras agreed to pay US$42.5bn of the deal proceeds back to the Brazilian government for the rights to 5bn barrels of oil in the pre-salt fields. Although determined by an independent auditor, the value set at R$14.96 (US$8.51) per barrel was viewed by some as overly expensive. At the very least the arrangement underscored the unusual relationship between the company and the government.
The controversy – and complexity – was increased when the time came to price the deal itself as that same amount that Petrobras had to pay for the exploration rights was injected into the company by the government as it bought US$42.5bn of the shares of the oil company in the US$50bn priority offering.
The US$50bn that the Brazilian government contributed to the deal did not make it any easier. In fact, because of the government, the deal took more than a year to get done, giving enough time for investors to short the stock.
Petrobras’s shares plunged roughly 25% for the year ahead of the formal launch of deal marketing. This reflected not only the overhang created by the stock sale but the defection of institutions that balked at the unusual arrangement.
The bookrunners were challenged to shift investor focus to the company’s long-term fundamentals and discounted valuation. Part of the effort involved a non-deal roadshow to sovereign wealth funds in Asia and the Middle East, which generated commitments that comprised roughly 5% of the public tranche.
The formal roadshow was even more impressive, encompassing four management teams that visited 35 cities in 15 countries over three weeks. Petrobras’s management conducted a total of 230 one-on-one meetings and 27 group events that resulted in meetings with roughly 760 institutions. Of that that total, about 540 institutions participated in the deal.
The effort culminated on September 23 with the pricing of 2.3bn ordinary shares at R$29.65, a 2% discount to last sale, and an additional 1.78bn preferred shares at R$26.30, a 1.9% discount. Reflective of the global distribution, roughly 60% of the voting shares ended up with US accounts, 25% with Brazilian investors and 5% in EEMEA, with the rest going elsewhere; and about half of the preferred shares placed in Brazil, 40% in the US and Canada, 9% in EMEA, and the rest elsewhere.
Christopher Langner
