Portugal Gets First IPO in Five Years After 70% Slump

Portugal is preparing for its first initial public offering in more than five years as the nation recovers from 10 straight quarters of contraction that erased about 70 percent in market value.

The government will sell 70 percent of CTT-Correios de Portugal SA next month, the first IPO since EDP-Energias de Portugal SA spun off its renewable-energy unit in June 2008. The PSI-20 Index has lost about 50 billion euros ($68 billion) in market value since peaking in 2007 as index members dropped out and investors shunned a gauge composed of banks, utilities and construction companies stung by shrinking domestic demand.

Portugal is counting on the offering to reduce debt and narrow its budget deficit as the third-most indebted member of the euro area seeks to meet European Union targets. The nation is planning to exit a rescue package in June after it became the third country in the region to ask for an EU-led bailout almost three years ago, as soaring bond yields forced it out of the borrowing market.

“This is a country which was especially hard-hit as a result of excess spending in the run-up to the financial crisis,” Teis Knuthsen, chief investment officer at Saxo Bank A/S’s private banking unit in Hellerup, Denmark, said by phone on Nov. 19. “An IPO would definitely be a constructive thing to see for a market which has lagged.”

PSI-20 Gain

The benchmark index of Portuguese stocks has risen 15 percent this year through yesterday, less than all developed European gauges tracked by Bloomberg, except Austria and the U.K. Spain’s IBEX 35 Index has advanced 20 percent in 2013, while Greek stocks have rallied 30 percent and Ireland’s ISEQ Index has gained 32 percent, data compiled by Bloomberg show.

The PSI-20 climbed 0.5 percent to 6,507 today, its highest level since August 2011. Portugal’s stock exchange, valued at about $82.5 billion, is among the smallest markets in western Europe and less than half the size of Ireland’s.

State-holding company Parpublica is selling as many as 105 million shares in CTT at 4.10 euros to 5.52 euros apiece, according to a Nov. 18 prospectus. Bidders have until Dec. 2, and trading is expected to start on Dec. 5. Demand reached more than 6 times the amount on offer, Portugal said this week.

The nation negotiated a 78 billion-euro bailout in 2011 with the European Commission, the European Central Bank and the International Monetary Fund as it began to run out of funds and lost access to the bond market. In exchange, the country had to increase taxes, reduce state spending and sell assets.

Deficit Targets

Portugal, which still has to trim spending by 3.2 billion euros next year to meet budget-deficit targets, is seeking to reduce its shortfall to 4 percent of gross domestic product in 2014 and to 2.5 percent of GDP in 2015, said Vitor Gaspar, who was finance minister at the time. The EU limit is 3 percent. The government predicts debt will peak at 127.8 percent of GDP this year, more than double the EU’s 60 percent ceiling.

The Portuguese economy expanded 1.1 percent in the April to June period this year, the first quarter-on-quarter growth since 2010. It probably increased 0.2 percent in the three months to September, preliminary figures showed. GDP will rise 0.2 percent next year and 0.9 percent in 2015, according to the median economist projection in a Bloomberg survey.

“After a few pretty difficult years, the future is looking rosier,” Bruno del Ama, chief executive officer of Global X Funds, which oversees a U.S.-listed ETF tracking the FTSE Portugal 20 Index, said in a phone interview on Nov. 15. “We’ve had hedge funds enquire about access products for Portugal, and this smart capital is a positive indicator of what may come for the equity market. A company deciding to IPO now is a big vote of confidence in the economy.”

Equity Valuation

At the upper end of the offering price, the nearly 500-year-old CTT will have an equity value of 828 million euros. That compares with 2.9 billion euros for Belgian postal service Bpost SA and 3.3 billion pounds ($5.4 billion) for the U.K.’s Royal Mail Plc at their offering price. Bpost shares climbed 9.2 percent from their June IPO and Royal Mail jumped 71 percent since listing last month.

The PSI-20 remains one of the riskiest national indexes in the 17-nation euro area because financing costs for Lisbon-listed companies are closely tied to the recovery, according to Diogo Teixeira, chief executive officer of Optimize Investment Partners, a Lisbon-based firm that manages 68 million euros in assets and first bought Portuguese stocks this year.

The yield on Portugal’s 10-year debt has slipped to below 6 percent after breaching the 17 percent level in January 2012. Still, the spread between the benchmark Portuguese and German bond yields was 4.14 percentage points yesterday, six times what it was in 2009. That’s the second-highest spread among euro-area countries, after Greece.

Market Stress

Even after stocks rebounded 47 percent from their low in June 2012, they’re 53 percent away from their peak in July 2007. Portuguese shares are twice as volatile as those in the Stoxx Europe 600 Index, with a measure of swings in the last 30 days at 14.1, compared with 6.9 for stocks in the broader European gauge, data compiled by Bloomberg show.

“If investors buy stocks today, what may seem like good value now can change very suddenly should borrowing costs surge during periods of market stress,” Teixeira said by phone on Nov. 20. “It’s one of Portugal’s biggest risks. It’s a very small market, and we decided not to buy a few names because it would be hard to exit these positions.”

Portuguese Mail

CTT, which controls 95 percent of the Portuguese mail market and delivers 29 percent of all parcels, reported 93.3 million euros in earnings before interest, taxes, depreciation and amortization in the nine months through September, a 13 percent increase from the same period a year earlier, according to an Oct. 29 statement. The Lisbon-based company had 212 million euros of net cash on Sept. 30.

“CTT’s profile is well suited to investors who want exposure to the Portuguese economy without taking too much risk,” Malek Dahmani, a Geneva-based analyst who helps oversee about 400 million euros on Lombard Odier Investment Managers’ Eurozone Small & Mid Caps team, said by phone on Nov. 14. “It has more cash than debt, which is key for investors looking at peripheral markets. CTT may not deliver top line growth yet, but it could reward you with a good dividend.”

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