Brazil Exchange Takeover Seen Requiring Higher Offer Price

  • BM&FBovespa offered 39 reais for clearing house Cetip stock
  • Shareholders will demand higher premium, according to analysts

BM&FBovespa SA, the operator of Brazil’s stock and derivatives exchange, may have to spend more than the 10 billion reais ($2.7 billion) it offered to take over fixed-income clearing house Cetip SA, according to analysts from Bradesco BBI and Credit Suisse Group AG.

The exchange operator said late Friday that it had offered 39 reais in cash and stock for each Cetip share, 2.1 percent above the stock’s closing price last week. The relatively low premium may prompt shareholders to demand a higher price from BM&FBovespa or to seek out new offers, according to Rafael Frade, an analyst at Bradesco BBI. International Exchange Inc., which already holds a 12 percent stake in Cetip, could make a competing bid to secure its foothold in Brazil’s capital markets, he said.

"This process can take a long time, with limited upside for Cetip shareholders," Frade wrote in a note to clients Monday. He cut his recommendation on the shares to the equivalent of hold from buy.

The proposed takeover would extend BM&FBovespa’s dominance in Brazil, where it runs the country’s main securities and derivatives exchanges and its stock indexes are the benchmark for global investors. BM&FBovespa has sought to diversify its business in recent years by expanding into fixed-income assets as stock trading volumes slump, but the market for debt securities remains dominated by Cetip.

While the proposal would be good for BM&FBovespa investors, they aren’t “compelling enough for Cetip’s minorities," Victor Schabbel, an analyst at Credit Suisse, wrote in a note to clients Monday.

Cetip climbed 0.3 percent to 38.31 reais at the close of trading in Sao Paulo, after earlier reaching 39.69 reais, the highest since it started trading in October 2009. The shares have gained 12 percent since the companies confirmed talks about a possible merger earlier this month. BM&FBovespa shares added 0.1 percent to 12.01 reais.

At least half of the payment for Cetip would be in cash, with the rest coming in the form of BM&FBovespa voting shares, according to a statement Friday to Brazil’s securities regulator.

“After the stock has risen so much, the premium seems too small,” said Felipe Silveira, an analyst at the brokerage Coinvalores. “Investors are expecting that BM&FBovespa could offer more, as other competitors may come in with better proposals.”

ICE’s press office declined to comment on the proposed deal.

Brokerages are concerned that an expanded BM&FBovespa would lead to higher trading fees, according to Caio Villares, the president of the association representing them.

"The players who want to stay in the game have to accept that," Villares said from Sao Paulo. "It would be a great deal for the shareholders of both companies, but our market would continue to be underdeveloped."

If concerns about competition arise, Brazil’s antitrust regulator could order BM&FBovespa to sell some of its businesses to reduce its market dominance, according to Pedro Lima Arantes, a lawyer at Nelson Williams and Advogados Associados.

The buyer "would have necessarily to be a foreign player, since there’s no other firm like BM&FBovespa or Cetip in the Brazilian market," Arantes said from Sao Paulo.

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