IPOs in Brazil at half of U.S. prices

May 11, 2019 • Reading Time: 7 minutes

Hello. This week’s issue: Brazil’s huge lottery rollover. IPOs in Brazil at half of U.S. prices. Plus, the most important facts of the week.

The week in review

Bolsonaro. The federal government remains at odds with Congress. This week, the Special Budget Committee voted to remove Brazil’s anti-money laundering authority from under Justice Minister Sergio Moro’s control—and has stalled a vote to confirm the cabinet structure Mr. Bolsonaro signed upon taking office. If it doesn’t get confirmed by June 3, the entire cabinet structure would revert to what it was under the previous administration. 

Avianca. A judge suspended airline Avianca’s court-supervised recovery plan approved on April 14—which canceled the auction of the company’s assets scheduled for May 7. With debts of over BRL 3bn, Avianca has lost 86% of its fleet (as planes were returned to leasers), laid off over 100 staff members, and canceled over 3,000 flights in recent months. The company was hoping to raise at least USD 210m from the auction and could now be forced into bankruptcy.

Venezuela. After nearly three months, Venezuela reopened its border with Brazil. In February, President Nicolás Maduro decided to suspend access between both countries after Brazil joined the U.S.-led effort to bring humanitarian aid into Venezuela—as part of a plan to oust the anti-democratic Mr. Maduro, who said the reopening of the border followed a “non-interference commitment” from Brazil.

Petrobras. Brazil’s state-controlled oil and gas company posted BRL 4bn in net profits after Q1 2019—a drop of 42% from one year ago, and below markets’ predictions. These results, however, are largely due to a change in how Petrobras does its books, as the company has adopted international financial reporting standards. Otherwise, profits would have been hovering around BRL 5.3bn.

Interest rates. The Central Bank’s Monetary Policy Committee decided to keep the Selic benchmark interest rate at 6.5% for the 9th consecutive time. The bank signaled that it shouldn’t promote any cuts in the foreseeable future. However, the Selic rate is bound to continue very low, even if it were to see a slight increase.

What could you buy with Brazil’s huge lottery rollover?

Every Wednesday and Saturday, Caixa (Brazil’s largest publicly-owned bank) holds its big lottery draw, the “Mega Sena.” Whenever no one guesses all 6 numbers, the prize rolls over to the following draw. The jackpot is around 30% of what Caixa raises, and tonight BRL 275m (or USD 70m) will be up for grabs. What could you buy with all that money?

Markets

May is set to be a volatile month for Sabesp, São Paulo’s sanitation company. The reason is a provisional decree that will make it easier for private firms to operate in Brazil. If Congress approves this decree, Sabesp’s controller, the state government of São Paulo, is set to privatize the company. The expectation pushed Sabesp shares up by 45% this year. But recent feuds between the Executive branch and Congress has made some analysts skeptical that lawmakers will approve the decree by its June 3 deadline.

Natália Scalzaretto, TBR markets reporter

IPOs in Brazil at half of U.S. prices

After amassing 1 million retail investors, B3—the São Paulo stock market—has a task to convince Brazilian companies against holding their initial public offerings (IPO) exclusively in the American market. There is one major benefit to this: it costs far less to go public in Brazil. A PwC report shows that fees in Brazil are, on average, 2.5 to 5.6% of what the IPO raises. In the U.S., they hover between 4 and 11.7%.

The consultancy firm analyzed IPO data from January 2004 to April 2018, and also surveyed chief financial officers and executives responsible for investor relations. In this period, 182 Brazilian companies held their IPO, 97% of them in Brazil. “The comparison is percentage-based, on a dollar baseline, so the data wouldn’t get distorted,” said Kieran McManus, a partner at PwC Brazil.

The biggest cost in an IPO are commissions to the banks which coordinate the offerings. For openings raising between USD 500m-1bn, companies pay on average USD 35.6m for an American IPO. In Brazil, they pay USD 20.8m.

Operational fees to remain publicly traded in Brazil are also cheaper. For 66% of surveyed companies, costs are below USD 400,000 per year. In the U.S., 67% of companies declared paying between USD 1-1.9m.

IPOs slowing down around the world

A study by consultancy EY shows that only 199 companies around the globe went public between January and March—down 41% from last year. That is because companies are waiting for a moment with less uncertainty about the future of the global economy. On Friday, ride-hailing giant Uber held its IPO, only to close the day down more than 7%, valued at USD 80bn, far below the USD 120bn that was floated as recently as December.

In Brazil, there are currently 336 companies listed on the stock market. B3 expects the year to finish with 20 to 30 IPOs—not counting operations from state-owned banks such as Caixa or Banco do Brasil. That will be only half of the 2007 peak, when 64 Brazilian companies went public.

Companies expected to hold their IPOs soon

After SBF, the controller of sports retail chain Centauro, raised BRL 772m in its IPO last month, investors are mapping which companies may present good deals in the near future. Market research company Suno Research selected a few companies expected to go public this year:

Vamos Locação: the company rents trucks and agricultural equipment—having several long-term contracts. Its list of clients encompasses the following sectors: agribusiness, energy, transportation, and food suppliers. Vamos has already informed Brazil’s securities commission (CVM) of its upcoming IPO, offering 53m common stocks.

Blau: the pharmaceutical company had scheduled an IPO last year, but decided to postpone in order to raise more money in the near future. Blau sells high-complexity medication to 22 countries.

Tivit: the IT company’s IPO request to CVM is under analysis. Tivit operates in 10 countries, selling cloud solutions, digital payment services, and IT infrastructure.

Agibank: this Rio Grande do Sul-based bank was founded in 1999 and also had its IPO scheduled for last year. However, the volatility created by the presidential election made the company wait. It hopes to raise BRL 2.5bn when it goes public.

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