IPO drought

IFR LatAm Special Report 2012
9 min read

Brazil has been at the helm of the Latin American equity issuance boom for years, but is now in the midst of a seven-month IPO drought. Eyes remained fixed on the continent’s largest economy, but focus is continuing to shift to other countries.

A senior ECM banker in New York said: “It’s going to be another tough year. There’s no way of getting around the risk aversion people are still feeling, along with the wrong companies trying to come to market at the wrong time.”

The turnround in Brazil’s IPO market, without a doubt, has been dramatic. In 2007 there were 70 new listings; last year there were just 11, with many priced below the indicative range.

It has indeed been a chilly start to the year in LatAm’s largest economy, as two IPOs were pulled, extending a seven-month drought of issuance until sometime around April when a quarterly blackout period ends.

Travel services company Brasil Travel Turismo and its shareholders dropped plans to sell shares in an IPO in February. The plan floundered due to lack of investor demand and unfriendly market conditions, according to people with knowledge of the situation.

“It really is a pity, not because of the company per se, but because it represented a reopening of a market that was on fire just a few years ago,” said a senior ECM banker in New York.

The deal’s failure signals that investors, who last year steered clear of local IPOs as Europe’s debt crisis worsened, will continue to shun companies that have an insufficient track record, poor earnings visibility or that could be vulnerable to a downturn.

Meanwhile, Norwegian offshore driller Seadrill postponed its plans in early February to unlock value in its Brazilian operations with a spin-off of the unit in an IPO. The company had planned to list the unit, Seabras, through a sale of 48m shares at a target price of R$20–R$26, but has now pushed that to April, according to a lead.

“In a bull market, there would not be nearly as many problems,” said an ECM banker in Brazil. “What people want right now are plain vanilla deals, and companies with stories they know instead of these obscure stories.”

The last Brazilian IPO was a R$371m deal from Abril Educacao in late July.

“What people want right now are plain vanilla deals, and companies with stories they know”

BTG Pactual IPO speculation

But ECM professionals received a boost in late February when news broke that BTG Pactual is the next jumbo set to hit the market, after Goldman Sachs and JP Morgan were mandated to lead the float in February. The two international banks will work alongside the emerging market specialist’s in-house team on a deal that is expected to value the bank at US$13bn–$14bn and price in the second quarter, possibly in April.

The float has been long anticipated as billionaire backer Andre Esteves has a long history of buying assets when they are cheap just to sell them later at a profit. Founder Esteves famously sold Pactual to UBS for six times book value in 2006 only to buy it back in 2009 for 1.5 times book – US$2.5bn.

Brazilian meatpacker JBS recently announced plans via Brazil’s SEC to sell shares of its dairy unit, Vigor. JBS hopes to list it on the Sao Paulo Stock Exchange. In a valuation report put out by Bradesco, there was mention of a range of R$11.35–R$12.48 per share.

Edemir Pinto, CEO of BM&F Bovespa, said he expected as many as 40 IPOs to make it this year. Others aren’t so sure. “I truly believe there will be at most 15 [IPOs] this year,” said a senior ECM banker in New York.

Eyes on the Andean region

In 2010 issuances out of Brazil totalled 78.6% of the LatAm total, with only 22.4% in other LatAm countries, while last year Brazil made up 52.3% of total equity-related issuances, versus 48.7% ex-Brazil.

“If you weren’t on deals outside Brazil [in 2011], you weren’t working enough,” said one ECM banker. “I see this continuing to be a trend, especially with the recent booms in other countries.”

One such boom took place in Colombia last year, though it’s been slow to start this year. “I don’t see the market having as many huge offering as last year,” said an ECM banker in Bogota. “We saw a lot of investor fatigue at the end of last year.”

That said, equity offerings out of the Andean nation skyrocketed from Ps521m in 2010 to Ps13.8bn in 2011, on the back of some jumbo offerings and a cultural shift towards equity.

Colombian construction company Construcciones el Condor may come to the market with an IPO which could be worth up to Ps200bn (US$110m), in mid-March of 2012, but is still awaiting approval from the Superintendencia Financiera de Colombia, according to someone with knowledge of the deal.

The investment banking arm of Bancolombia has been named sole bookrunner as of now. This year, the Colombian Government had announced it would spend some US$6bn on infrastructure, making this sector highly desirable, said a local analyst. (For more on Colombia infrastructure, see “The road to prosperity”.)

Colombian paper and printing company Carvajal is set to come to market with an IPO this year, said someone with knowledge of the deal. Size and timing have yet to be determined. The sole bookrunner on the deal is Corredores Asociados. Carvajal is 64.2% owned by the Carvajal family and 35.8% by the Fundacion Carvajal. It operates in 17 countries and 36% of its revenue is derived from outside Colombia.

In addition, Colombia’s second-largest ironworks outfit, Acerías Paz del Río, is planning a follow-on for the early half of 2012. Joint bookrunners are Corredores Asociados and Carvajal. The company is under the control of Brazil’s Votorantim Siderurgia.

“There has been a major shift from companies taking out loans or issuing debt and a new appreciation for the equity markets in general in these Andean countries, and we will see more going forward next year,” said an analyst from Correval, a local brokerage.


There were signs of fatigue in the last few offerings – from EEB, Davivienda, Ecopetrol and GrupoSura. They all got done, but were below the price range. EEB placed 77.2% of the total amount issued; Davivienda placed 89.5% of the total amount issued; and the share issuance of Ecopetrol was 95.3% subscribed, while GrupoSura was 90% subscribed.

Peru, long on the sidelines, has had a humble but significant start to 2012. Cement company Cementos Pacasmayo priced a US$230m IPO at the low end of its proposed range, or US$11.50 per ADS. The range had been US$11.50–$13.00. It was originally expected to raise as much as US$250m. Although it was at the low end, the company was “happy” with the outcome, especially with market conditions being what they are in the LatAm equity capital markets, according to someone with knowledge of the deal. Peruvian investors made up 30% of the book, while orders from Chile comprised 15%, with 5% coming from Brazilian institutional and the remainder from the US.

“Pacasmayo came on the low end of what they expected, and today the price came down, but still it’s the first Peruvian cement company to issue an ADS and therefore interesting,” said a Peruvian pension fund manager.

The Peruvian government has also expressed interest in floating shares of state-owned oil and electric companies Petroperu and Electroperu.

Mexico on the rise?

Meanwhile, one particularly dormant market last year was Mexico, though ECM bankers are saying there are about 10 IPOs in the pipeline for this year. In 2011, however, there were just two. Nonetheless, companies not satisfied by taking out more debt, either in the form of loans or bonds, are crossing their fingers with regards to global and US stability.

“The reliance of Mexico on the US stability means that we have to see some consistent positive news,” said an ECM banker. There has to be a bit of a cultural shift, too, when it comes to a company going public, added another banker.

“In Brazil, it’s considered a huge thing to have an IPO, a big success, but in Mexico, there are a lot of old, family-owned companies who are just now starting to think going public is something to look into.”

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IPO drought