Bear Market Collapse Scuttles $3.7 Billion IPO: Corporate BrazilJulia Leite and Denyse Godoy
Brazil’s bear-market collapse, the worst among major global equity indexes, is starting to cool off a record boom in initial public offerings.
Votorantim Cimentos SA, the Sao Paulo-based cement maker, suspended its sale of as much as $3.7 billion of shares planned for this week because of the market selloff, according to a company statement published in newspaper Valor Economico. The deal was poised to be the world’s second-largest this year, smaller only than Brazilian insurer BB Seguridade Participacoes SA’s $5.7 billion sale in April.
The Ibovespa has plunged 24 percent from a Jan. 3 peak, leaving it down the most this year among the 20 biggest equity markets tracked by Bloomberg, as Brazil’s economic expansion faltered and rising U.S. bond yields lured money away from emerging markets. Votorantim’s decision to scrap its deal follows a spurt of six Brazilian IPOs since January worth $7.3 billion, more than triple the amount a year earlier and the most for the start of a year since at least 2002. IPOs are down 4.2 percent globally in 2013, including a 31 percent drop in the U.S.
“It’s a terrible time” to sell stock, Luiz Carvalho, a managing partner at New York-based hedge fund Tree Capital, said in a telephone interview. “The market conditions are different now from what they were one, two months ago. For the deal to work today, the price would have to be lower.”
Votorantim Cimentos, which is controlled by Votorantim Participacoes SA, a conglomerate that produces everything from steel to pulp, said it suspended the offering because of “unfavorable market conditions.” The IPO has been postponed until Sept. 11, according to the regulator’s website. Votorantim planned to use the proceeds to fund expansion plans, improve operations and increase working capital, according to a prospectus on its website.
The Ibovespa sank into a bear market on June 11 as inflation soared in Latin America’s biggest economy even as growth sputtered.
Consumer prices jumped 6.5 percent in the 12 months through May, reaching the upper end of the country’s target range and prompting the central bank to raise benchmark interest rates from a record-low 7.25 percent. The economy expanded 1.9 percent in the first quarter, less than the 2.3 percent median forecast in a Bloomberg survey of analysts, as President Dilma Rousseff’s lending surge, tax cuts and electricity cost reductions failed to stoke output.
Analysts have cut Brazilian corporate earnings forecasts faster than stocks have plunged, making equities more expensive. Shares on the Ibovespa traded today at 11.6 times analysts’ earnings estimates for the next four quarters, up from 9.9 a year ago.
Preparations for the 2014 World Cup and 2016 Olympics, which require combined infrastructure spending of about 60 billion reais, haven’t provided the lift to companies’ earnings that some investors had anticipated, according to Ivan Kraiser, head of equities at the asset management firm Legan Administracao de Recursos in Sao Paulo.
“There was a huge expectation,” Kraiser said. “It was a little exaggerated.”
Standard & Poor’s cut the outlook on Brazil’s BBB credit rating outlook to negative on June 6, citing sluggish growth, weakening fiscal accounts and the government’s loss of credibility with investors. More than 200,000 people demonstrated in 12 cities throughout Brazil on June 17, venting anger over everything from inflation to the quality of the country’s hospitals and schools.
The Ibovespa selloff didn’t slow Brazil’s IPO market until losses intensified in May. BB Seguridade and Smiles SA, the frequent-flier unit of airline Gol Linhas Aereas Inteligentes SA, both priced deals on April 25. Shares from five of this year’s six IPOs have rallied since their debut, led by a 32 percent surge in technology company Linx SA and a 22 percent jump in Smiles. BB Seguridade is up 2.5 percent.
Brazilian companies, needing capital to expand at home and abroad, had tired of waiting for a better time to go public after the Ibovespa underperformed the MSCI World Index in each of the past three years, according to Nick Robinson, the head of Brazilian equities at Aberdeen Asset Management.
“A lot of these companies have been delaying and delaying their IPOs, always waiting for better market conditions,” Robinson, whose firm has about $15 billion of Latin American equities under management, said in an interview in New York before Votorantim canceled its deal. “Perhaps we just got to the point when they thought, ’We want to get our IPO done.’”
BB Seguridade, a unit of state-run Banco do Brasil SA, sped up its sale plans because it was concerned the market would deteriorate, according to Leonardo Mattedi, the insurer’s investors relations director.
“We had this view that the scenario wouldn’t be favorable for IPOs during all of 2013,” Mattedi said in a phone interview from Brasilia.
Linx, a Sao Paulo-based software supplier, sold 527.9 million reais of shares in February in part to avoid taking on debt as policy makers raise borrowing costs, Chief Executive Officer Alberto Menache said.
“There’s never an ideal time to do an IPO, but there are always investors looking for a good company that’s selling shares at a fair price,” Menache said in a telephone interview.
David Neeleman’s airline Azul Linhas Aereas Brasileiras SA has also filed to go public while Itau Unibanco Holding SA’s investment boutique Kinea Investimentos Ltda said it plans to take two of its holdings public.
Officials Kinea declined to comment. Azul said in an e-mailed response to questions that it intends to continue with plans to IPO, and is “following markets closely” for the best time to sell shares.
Brazil’s IPO surge wasn’t replicated in the other so-called BRIC countries, where benchmark stock indexes slumped at least 0.9 percent this year. Chinese securities regulators suspended offerings in October to ease the market rout. Offerings have declined 12 percent in India. There’s been one deal in Russia, matching the total from a year ago.
Brazilian companies are going to have to lower IPO prices to revive the market after the Votorantim deal collapsed, according to Rogerio Freitas, a partner at hedge fund Teorica Investimentos in Rio de Janeiro.
A good asset will sell “in a poor macro environment at the right price,” Freitas said in a phone interview.