The last couple of equity deals of 2013 from Brazil failed to change the bearish sentiment that has dogged the market for fresh equity for more than a year. Investment bankers will be hoping for an improvement in investors’ appetite for Brazilian equity in 2014, but with the World Cup and a presidential election this year there is little on which to build foundations of optimism. However, a report by global consultancy McKinsey offers hope that Brazilian and Latin American equity issuance will grow strongly, albeit in the longer term.
In December 2013 travel agency CVC Brasil managed to price its long-awaited IPO (the company initially filed to come to market in 2011), but it was yet another deal to launch below its R$18 to R$22 price range. The company had to settle for an initial price of R$16, selling 38.8 million secondary shares in a deal led by Bank of America Merrill Lynch, BTG Pactual, Itaú BBA, JPMorgan and Morgan Stanley that raised R$621 million ($236 million). The sale constituted about 30% of the company and was the exit strategy of US private equity firm Carlyle.
A week later, Via Varejo, a Brazilian retailer, also priced below its range of R$29.60 and R$33.60. This time the deal was a follow-on, but the retailer chose to sell through the range because it was the launch of the specific shares on offer – secondary units – and its common shares are illiquid. The shares priced at R$23 – a significant discount. The transaction raised $2.85 billion-equivalent compared with the target of around R$4 billion. Bank of America Merrill Lynch, Bradesco BBI and Credit Suisse managed the deal.
The Via Varejo transaction brought the total ECM issuance from Brazil to $13 billion, up from 2012’s disappointing total of $9.4 billion. The poor equity performance has been attributed to a range of factors, from disappointing GDP growth and increasing political risk to the currency’s volatility and, most recently, the withdrawal of capital from emerging markets.
However, the report by McKinsey offers succour to the equity capital market groups at investment banks in the region. The firm has researched the growth patterns of large corporations around the world and analysed the correlation between the development of cities and urbanization and isolated “city GDP growth” as a variable in a linear regression model to explain the location and revenue of the world’s emerging large companies (categorized as those with annual revenues of over $1 billion).
As well as predicting where the world’s large companies will emerge, and those that will require big amounts of equity investment during their rapid growth, McKinsey also reveals the level of fluidity in the ranks of the world’s largest companies. The report indicates that only 270 of the world’s largest companies in 1998 (the Fortune Global 500) were still on the list in 2012; 140 fell below the rising revenue threshold and another 90 left through merger, acquisition or bankruptcy. Projecting forward, the consultancy says that this state of flux will continue, with an additional 7,000 large companies expected to emerge by 2025 to add to those of the 8,000 large companies currently operating that survive.
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