Brazilian brokerage firm XP Holding Investimentos has pulled its IPO in favour of selling a large minority stake to Itaú.
The announcement came just days after XP had filed for an IPO that was expected to raise between $1.5 billion and $2 billion. The São Paulo-based brokerage had hired JPMorgan, Banco do Brasil, Bank of America Merrill Lynch, Bradesco, BTG Pactual, Goldman Sachs, Morgan Stanley and Safra to lead the primary equity offering.
Speaking to Euromoney in New York, one of the bankers working on the deal says its cancellation was a loss to the nascent recovery in the Brazilian equity markets.
“It was going to be a good story in the development of the Brazilian equity market,” he says. “Investors were very interested and this deal ticked a lot of the boxes for the type of company that they are looking for.
“Also, had XP been successful – which I am confident that it would have been – it would have helped others come to market. But I understand why XP decided to take the certainty of Itau’s offer because there is always a risk when conducting an IPO.”
Meanwhile, the decision was welcomed by banking analysts as a potentially significant transaction for Itaú – albeit dilutive, as the deal assumes XP’s value at R$12 billion ($3.86 billion) with an estimated 2018 price-to-earnings multiple of 20.0-times, compared with Itau’s 9.2-times valuation multiple for estimated 2018 P/E.
However, XP’s potential, given the macro outlook for asset managers in Brazil in an environment of falling interest rates and its market-leading position as an innovative and tech-savvy retail stockbroker, is one of fast growth. XP had net income of R$240 million in 2016, which is expected to grow to R$600 million by 2018, implying a compound annual growth rate of 58%.
Deutsche Bank’s Tito Labarta, equity analyst for financial institutions, says although the deal only represents an initial 2% of Itaú market cap – and is equivalent to only 1% of 2018 earnings – it could be a significant development if the brokerage maintains its recent growth record, though he cautions that maintaining XP’s recent results will be tough. According to the terms of the staggered transaction, Itaú will acquire a 49% stake (30% of voting shares) of XP for R$5.7 billion plus a R$600 million capital increase. Itaú will then buy a further 12.5% stake in 2020, reaching a 62.4% stake (40% of voting shares) at 19-times P/E, and another 12.5% stake in 2022, reaching a 74.9% stake (49.9% of voting shares) based on XP’s fair market value at that time.
As a minority shareholder, Itaú will receive the right to appoint two out of seven members of the board of XP Investimentos. Furthermore, XP reserves the right to exercise a put option to sell 100% of its shares in XP Investimentos to Itaú as of 2024, while Itaú might exercise a call option to purchase 100% of equity in XP Investimentos as of 2033. If these options are exercised, Itaú will have acquired full control and all of XP Investimentos’s equity.
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