IPO’s Money-Back Option Soars as Biosev Slumps: Corporate Brazil

Biosev SA, the Brazilian sugar mill controlled by Louis Dreyfus Holding BV, is posting an unusual kind of stock market rally after last month’s $347 million initial public offering.

The value of options contracts that Biosev gave investors as a money-back guarantee in the IPO has soared more than eight-fold to 2.04 reais. The puts, which give holders the right to sell the shares back to the company in 15 months at the IPO price plus accrued interest, are rallying as the stock sinks. Biosev has fallen 8 percent to 13.80 reais from 15 reais at the April 19 sale.

The rally in the options signals investor concern that the stock will keep falling after a 48 percent plunge in the price of sugar, which accounts for 66 percent of Biosev’s revenue, and a 10 percent decline in ethanol. Biosev, the most indebted among publicly listed Brazilian sugar mills, revived the IPO a year after a first attempt failed by offering the money-back guarantee and by getting parent company Louis Dreyfus to buy 12 percent of the deal.

“It was a very unusual structure,” Luiz Carvalho, a managing partner at Tree Capital, who participated in the offering, said by phone from New York. “I’d never seen it. We spent a lot of time understanding it. You have a large number of put holders, so it will take a while for the stock to start trading more in line with the market.”

Trading Debut

Marco Modesti, Biosev’s director of investor relations, said the performance should be evaluated by taking into account both the drop in the stock and the gain in the puts, as 90 percent of investors in the IPO purchased them in combination. By that measure, Biosev has gained 5.6 percent from the starting price.

The company’s production for the 2013-2014 crop is protected by hedging and won’t be negatively impacted by the drop in sugar prices, Modesti said.

“The shares’ performance should not be separated from that of the put option,” Fabio Nazari, a partner at Grupo BTG Pactual responsible for the equity capital management area, said in a phone interview from Sao Paulo. “The investor who acquired the ’combo’ is gaining.”

The shares sank 14 percent in their debut, the biggest first-day drop in Brazil since 2008. The puts, sold for 25 centavos apiece, soared to 2.70 reais in the first day of trading. The Ibovespa equity benchmark, which has fallen 8.2 percent this year, gained 1.4 percent that day.

Biosev’s net debt equals 5.2 times earnings before interest, taxes, depreciation and amortization, according to data compiled by Bloomberg. The average ratio among its four publicly traded peers in Brazil is 3.8 times.

IPO Deadline

The company shelved an IPO last year citing “economic uncertainties” in the financial markets, according to a July regulatory filing. Biosev 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.

“With the embedded put options, they’re just borrowing money for a year,” Salim Morsy, an analyst at Bloomberg New Energy Finance in Sao Paulo, said in a phone interview. “The general bad mood for Brazilian equities, compounded by the fact that the Brazilian sugar cane industry hasn’t been doing well in the past two years, tells me no one would willfully IPO at a time like this.”

Biosev had an August 2014 deadline to do an IPO, Modesti said. Under the terms of an agreement with controlling shareholders, it had to sell a minimum 25 percent stake for at least $300 million, according to a statement attached to the prospectus filed with securities regulators.

‘Additional Comfort’

“The fact that the investor had the option to buy the put, giving some assurance of a return, brought additional comfort and was one of the reasons behind the success of the offering,” Modesti said by phone. “The company didn’t do this just to repurchase shares in 15 months. We’re working to deliver on our plans.”

Biosev and its investment bankers chose to structure the offering with the money-back guarantee because they thought investors didn’t have enough information about the company and the biofuel industry, according to BTG Pactual.

“It was an innovative operation, but perfectly understandable,” Nazari said. “Selling put options together with the shares actually shows the strong commitment that the controlling shareholder has to its new partners in the business.”

The six Brazilian IPOs this year show the market for new offerings is rebounding after last year brought just three deals, the scarcest since 2003. BB Seguridade Participacoes SA, the insurance unit of lender Banco do Brasil SA, was the world’s biggest initial public offering in 2013.

‘Greater Confidence’

“The fact that you’ve had six IPOs this year means there’s some greater confidence in the stability of the market,” Andres Calderon, a portfolio manager at Hansberger Global Investors, which oversees $6.2 billion in assets, said in a telephone interview. “And you don’t need a brand name or large event in order to get a deal completed. Good companies of medium sizes are coming to market and having successful debuts.”

Shares in four of the five other companies that did IPOs this year have risen from their initial prices. Technology company Linx SA has jumped 32 percent. Smiles SA, the frequent-flier unit of Gol Linhas Aereas Inteligentes SA, has advanced 15 percent and BB Seguridade has climbed 7.4 percent. Alupar Investimento SA has gained 1.1 percent, while Senior Solution SA is trading unchanged.

Record Harvest

The success of Biosev’s IPO will depend on how the company manages its operations and production costs, according to Bloomberg New Energy Finance’s Morsy. While Brazil has implemented tax breaks and other measures to boost ethanol output, they won’t be enough to counter biofuel producers’ falling profit margins after a 48 percent slump in sugar prices since early 2011, Antonio de Padua Rodrigues, technical director at industry association Unica, said on April 29. Prices of hydrated ethanol used as fuel retreated 10 percent over the same period, according to data compiled by Unica.

This year’s record harvest and productivity improvements should help dilute fixed costs, Biosev’s Modesti said. The company’s capital expenditures totaled 938.6 million reais in the nine months ended in December, a 4 percent reduction from the previous year, while net debt rose 10 percent, according to a Feb. 14 regulatory filing.

“It’s probably going to be a much better year for producers than last year,” Morsy said. “But not enough to justify $300 million or $400 million of investments in new assets. The market finds itself now where it’s not losing any money, but certainly not doing well enough to expand more.”

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