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IPOs Dry Up as Rousseff Rules Spur Stock Rout: Corporate Brazil

IPOs Dry Up as Rousseff Rules Spur Stock Rout
Brazil's President Dilma Rousseff’s interventionist policies are driving down stock prices and costing Brazil its position as Latin America’s biggest market for initial public offerings. Photographer: Jonathan Ernst/Bloomberg

President Dilma Rousseff’s interventionist policies are driving down stock prices and costing Brazil its position as Latin America’s biggest market for initial public offerings.

Software maker Linx SA’s 527.9 million-real ($268.4 million) IPO on Feb. 6 was Brazil’s first in nine months after just three deals in all of last year, the fewest since 2003. That compares with six in Mexico, including Grupo Financiero Santander Mexico SAB, the nation’s biggest share offering, marking the first time in nine years that Brazil didn’t have the most IPOs in the region.

The benchmark Bovespa index fell 23 percent in dollar terms in the past year through yesterday, compared with the MSCI Emerging Market Index’s 1 percent gain, as measures intended to spur economic growth eroded profits in some of Brazil’s biggest industries. Rousseff’s rules forced state-controlled oil company Petroleo Brasileiro SA to charge below-market gasoline prices, pushed banks to reduce profit to “civil levels” and changed utility contracts to lower electricity rates.

“What has driven investors away from equities is the government’s interference in the markets,” Fausto Gouveia, who helps manage 380 million reais at Legan Administracao de Recursos, said in a phone interview from Sao Paulo. “From the Bovespa’s recent performance you can tell that there’s barely demand for the stocks that are already trading, so why would it be any better with newcomers?”

Slowing Growth

Growth in Latin America’s biggest economy slowed to 1 percent in 2012, from 2.7 percent in 2011 and 7.5 percent in 2010, while inflation exceeded the 4.5 percent midpoint of the central bank’s target range for 29 consecutive months in January.

Petrobras, as Petroleo Brasileiro is also known, dropped 32 percent since February 2012 through yesterday. State-controlled lender Banco do Brasil SA slipped 13 percent and power supplier Centrais Eletricas Brasileiras SA tumbled 62 percent in the same period. Energy, financial and utility companies have a combined weighting of about 42 percent in the Bovespa index, according to data compiled by Bloomberg.

As stocks fell, the average valuation of the Bovespa’s 69 members slid to 1.1 times the value of their assets, the lowest versus the MSCI index since 2007, leaving new issuers on the sidelines waiting for the market to improve.

‘Depressed Markets’

“The government in Brazil has been very interventionist in several sectors, which has hurt sentiment,” Gabriel Wallach, who manages about $2.5 billion in global assets as chief investment officer of global emerging market equities at BNP Paribas Investment Partners in Boston, said in a telephone interview. “Brazilian corporates are eager to sell, and they haven’t been able to because of the depressed markets.”

The Finance Ministry declined to comment on the drop in IPOs in an e-mailed statement. Officials from Brazil’s presidential office did not respond to an e-mail sent by Bloomberg.

Five companies canceled or postponed plans for an IPO in Brazil last year, and two out of the three deals closed were priced below the lower range of the target set by the banks coordinating the offerings, according to data compiled by Bloomberg.

The Bovespa’s decline has pushed valuations to levels lower than in countries such as Mexico, making share sales less attractive for Brazilian companies as issuers want to sell at higher levels, according to Wallach and Otavio Vieira, a partner at Rio de Janeiro-based hedge fund Fides Asset Management. Brazil’s benchmark index trades at 10.7 times its forecast earnings for the next four quarters, which compares with a ratio of 15.3 times for Mexico’s IPC index.

Debt Sales

“With stocks trading at current valuations, most companies would probably be better off looking for other sources of funding, such as debt,” Vieira said in a phone interview. “The debt market has been doing quite well lately, and Brazilian companies have been able to borrow at a reasonable cost.”

Brazilian corporate debt returned 12.8 percent in 2012, the best performance since 2009, according to JPMorgan Chase & Co. index data.

The country’s biggest companies led a record $47.4 billion in overseas debt sales in 2012, the most ever from a developing country, according to data compiled by Bloomberg. Junk-rated debt issuance from Brazilian companies reached $4.25 billion last month, second only to China among emerging markets.

While IPOs suffered in the past two years with the Bovespa’s decline, faster economic growth this year should boost the equity market and increase demand for shares sold in initial offerings, said Bernardo Rothe, the executive manager of capital markets at Banco do Brasil, the biggest underwriter of Brazilian IPOs in 2012.

Growth Outlook

“There’s a strong link between the Bovespa’s performance and demand for IPOs, so if the market performs better this year, as many people believe it will, there should be also a pick up in share sales,” Rothe said in a phone interview from Sao Paulo. “Companies may use debt to fund their business as well, but debt is not a substitute for equity. Each instrument has its own purposes.”

Brazil’s gross domestic product will rise 3.1 percent in 2013, according to the median estimate in a central bank survey of about 100 analysts published on Feb. 4. Consumer prices measured by the IPCA index will rise 5.47 percent in the next 12 months, the survey indicated, less than the 5.53 forecast in the previous week.

Smiles IPO

Sao Paulo-based Linx, whose IPO was priced within the target range, said in its prospectus it plans to use proceeds for acquisitions and to increase working capital. Shares jumped 15 percent to 30.95 reais at 12:04 p.m. in Sao Paulo today, its first day of trading. Gol Linhas Aereas Inteligentes SA, the world’s most indebted airline, is planning to list its frequent-flier unit Smiles and its board is scheduled to meet today to decide which banks will manage the sale.

Gol’s press office said the company wouldn’t make any additional comment about the Smiles IPO other than what has been said in regulatory filings. The airline said in a statement on Dec. 21 that its unit’s share offering is subject to market conditions and approval of regulators.

While rebounding global growth may open temporary “windows of opportunity” for IPOs in Brazil, slowing economic growth and government intervention should keep these offerings from posting a sustained recovery anytime soon, Legan’s Gouveia said.

“I think you may see some successful IPOs here and there, but those would be the exceptions, not the rule,” he said. “Overall, I don’t see the market eager to take on more offerings.”

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