IPO’s Money-Back Guarantee Shows Bovespa Slump: Corporate Brazil

Brazilian equity sales have slowed so much that Louis Dreyfus Holding BV, the world’s second-largest sugar-cane processor, is dangling a money-back guarantee to investors who buy shares in its initial public offering.

Biosev SA, Dreyfus Holding’s Sao Paulo-based unit, unveiled the deal sweetener to spur demand eight months after its first attempt to raise $579 million failed. Just three Brazilian companies did IPOs in 2012, the fewest in nine years, with two of those pricing shares below their target. Mexico had six in the same period, the first time since 2003 that Brazil didn’t lead Latin America in IPOs.

The money-back guarantee is unprecedented in Brazil, according to the stock market regulator. David Menlow, president of Green Brook, New Jersey-based IPOFinancial.com, said he’s never seen a deal like this in his 24 years analyzing initial public offerings across global markets. Biosev is seeking to tap a stock market that is the fifth-worst performer in the world this year, dragged down by government intervention in industries including utilities, oil and banking.

“It sounds like a sign of desperation from a company that wants to do an IPO in a moment that’s clearly not favorable,” Saulo Sabba, who helps manage 350 million reais ($178 million) at Faros Investimentos, said in a phone interview from Rio de Janeiro. “I’ve never heard of anything like this.”

Sabba said he doesn’t plan on buying shares in the IPO.

Put Options

The benchmark Bovespa index has dropped 3.3 percent in 2013 as President Dilma Rousseff’s stepped-up control of the economy fails to rekindle growth. Latin America’s biggest economy expanded 0.9 percent in 2012, the national statistics agency said March 1. That’s less than half the government’s forecast of 3.5 percent at the start of last year and is the slowest pace among major developing nations, according to data compiled by Bloomberg.

Biosev will issue shares and Louis Dreyfus will sell put options that allow investors to return the stock to the Amsterdam-based company in 15 months for the offering price plus interest, according to a preliminary prospectus. The company’s board of directors will determine the share price, while the price of the put options will be established as bankers gauge investor demand, according to the prospectus.

Brazil IPOs

Two companies have done IPOs in Brazil this year, data compiled by Bloomberg show. Senior Solution SA priced shares at 11.50 reais yesterday after market close, below the expected range, according to the regulator’s website. Linx SA priced shares at 27 reais in an IPO last month, the top of its expected range, data compiled by Bloomberg show.

Seadrill Ltd., the oil-rig operator controlled by billionaire John Fredriksen, offered a similar structure on a secondary share offering in Oslo in March 2012. The shares have fallen 8.2 percent since the $1 billion offering, lagging behind the 10 percent rally in Norway’s benchmark OBX index.

Banco BTG Pactual SA is managing the Biosev offering. A Pactual official didn’t return a phone call seeking comment on the share sale structure. Officials for Biosev and Louis Dreyfus declined to comment on the deal.

The Bovespa index’s 15 percent decline since President Dilma Rousseff took office in January 2011 is the steepest among major stock benchmarks in the Western Hemisphere, as concern mounted that interventionist policies including forcing state-controlled oil producer Petroleo Brasileiro SA to charge below-market gasoline prices will hurt corporate profits while failing to boost the economy. A press official at Brazil’s Finance Ministry declined to comment.

Shelved IPO

A press official at Brazilian exchange operator BM&FBovespa SA declined to comment on the market’s performance. The company’s chief executive officer, Edemir Pinto, told reporters last month between 40 and 45 companies were “ready” to do IPOs.

Biosev’s net debt equals 4.1 times earnings before interest, taxes, depreciation and amortization, more than any other listed Brazilian sugar company. The producer shelved an initial share sale last year citing “economic uncertainties” in the financial markets, according to a July regulatory filing. The company was trying to raise as much as 1.14 billion reais at the time by selling the shares for as much as 20.50 reais each.

Required Sale

Having failed in its first attempt, offering a minimum return could help boost demand, said Eduardo Carlier, head of core equities at Schroder Investment’s Brazilian unit.

“It all depends on how confident the company is that there’ll be demand for the shares,” Carlier said by phone from Sao Paulo. “If there are doubts, than offering to protect the initial investment for a certain period of time may help put investors at ease.”

Biosev has a deadline in 17 months that it established with controlling shareholders to do an IPO in Brazil or New York. Under the terms of the agreement signed in 2009, Biosev must sell at least a 25 percent stake for $300 million or more, according to a statement attached to the prospectus filed with securities regulators.

Even with the money-back guarantee, the deal won’t be attractive if the company doesn’t show evidence that it can create value in the future, said Eric Conrads, a portfolio manager who oversees $750 million in Latin American stocks at ING Investment Management.

‘Too Risky’

“I’m a bit skeptical,” Conrads, who said he’s never seen such an IPO provision in his 16 years of trading Latin American stocks, said in a phone interview from New York. “If the pricing were attractive, you wouldn’t need to place put options.”

Offering put options is risky because there are too many variables that are beyond the company’s control that might make it difficult to buy out shareholders looking to sell back, according to Sabba.

“It doesn’t make any sense,” he said. “If the market goes down in the next year and half, how will they pay for the buyback? I think it’s too risky. Even if their business goes well, some external factor might push shares lower. It’s something they can’t control.”

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