Corporate Finance : Brazilian Deluge Saturates The Market


Brazilian cleaning company Atmosfera Gestão e Higienização de Têxteis suspended plans for an initial public offering last month as investors tired of the rapid-fire pace of new listings on Bovespa, the Brazilian stock exchange in São Paulo.

As of early April, some 25 companies had filed requests with the Brazilian securities regulator to sell shares to the public, nearly equal to the total of 26 companies that began trading in all of 2006.

Atmosfera had planned to raise $150 million in its IPO but suspended the sale for at least two months in the face of weak investor demand. A week earlier, two Brazilian real estate companies were forced to reduce the size of planned offerings and accept lower prices in the face of the glut of new issues on the market.

São Paulo-based JHSF Participações, which specializes in shopping centers and office buildings, cut the size of its offering to 47 million shares from 81 million shares originally planned. It also lowered the offering price and delayed the issue by two weeks. The shares were to be sold in Brazil and to investors in the US via American depositary receipts.

Another real estate developer, Even Construtora, raised $195 million from its IPO on Bovespa by selling 34.8 million shares, down from an initially planned 51.3 million common shares. The shares were offered to qualified foreign investors under Rule 144A of the US Securities and Exchange Commission relating to the resale of securities to financial institutions.

The lack of investor demand followed a wave of successful Brazilian offerings. On March 16 the New York Stock Exchange listed the American depositary shares of Gafisa, a Brazilian homebuilder that raised $493 million. That brought the total number of NYSE-listed companies from Brazil to 32, with a combined market capitalization of more than $410 billion. On average the NYSE trades more than $1 billion of Brazilian ADRs every business day.

Gafisa appointed Citi as depositary for its ADR program. The company’s NYSE listing represented an upgraded DR program. Previously, Gafisa had offered its shares to investors through a privately placed global depositary receipt program.

Major Brazilian listings on the NYSE include TAM, an international airline; CPFL Energia, an energy company; and Gol Linhas Aéreas Inteligentes, an airline whose market cap has increased by about 300% to $5.1 billion since it listed in 2004.

Merrill Lynch estimated in a research report published on April 5 that Brazilian equities would return 24% in the next 12 months. “Our bullish views on Brazil are anchored on hefty earnings growth, an easing monetary cycle and the investment-grade outlook,” the report says.

Brazilian earnings growth should continue to outperform Latin America and global emerging markets, supported by expanding domestic activity, a strong local currency and elevated commodity prices, according to the Merrill Lynch report. It expects Brazil to receive an investment-grade rating by 2009.

Meanwhile, Brazil-based beef holding company JBS, which controls beef exporter Friboi, raised $775 million from its IPO on Bovespa on March 28. The shares were sold to qualified foreign investors in the United States under SEC Rule 144A. JBS is the largest producer of beef in Latin America and one of the largest beef exporters in the world, with customers in more than 110 countries. JPMorgan Chase was the lead coordinator of the IPO.

Banco Pine, a mid-size private bank that specializes in loans to small and medium-size companies, raised $250 million from its IPO on Bovespa. Credit Suisse coordinated the sale of shares, which were also made available to qualified foreign investors under Rule 144A.

Brazil-based shopping center operator BR Malls Participações raised $295 million in an IPO on April 3. UBS Pactual led the offering, and the shares were sold locally and to foreign institutional investors in the form of GDRs.