End of the IPO Party
By: Phillip Lee
Editor, Brazil Business Today
This week, two more companies joined a growing list of new issuers receiving less than hoped from their IPOs on the Brazilian Bovespa. Seven of the 10 new listings this year have priced either below or at the bottom of the suggested range of underwriting banks.
Brazilian health insurer Qualicorp (Bovespa: QUAL3), which began trading on Wednesday, was one of the four to price below range. The R$13 (US$8.15) price was more than 25% below the R$17.50 mid-range point. Technos (Bovespa: TECN3) starts trading today. The Brazilian watchmaker did slightly better, securing the R$16.50 per share price at the very bottom of the R$16.50 - R$ 20.50 range set by banks. A third listing this week actually managed a price around its mid-range. The drug store chain Brazil Pharma (Bovespa: BPHA3) priced at R$17.25, close to the middle of its R$16.25 - R$19.25 range.
Currently, cautious investors, not investment banks, are pricing Brazilian IPOs. The question is whether banks are setting prices too high or demand for equity has decreased. The Bovespa is down by about 9% this quarter. Of all the IPOs this year, only one achieved a price at the very top of the suggested range, but that was at the end of January. Footwear company Arezzo (Bovespa: AR223) priced its IPO at the R$19 ceiling of the estimated price range. Since then, some companies - including CAB Ambiental and Cimentos Liz - have scraped or postponed their IPO plans.
Brazil's IPO fever started in 2007, when 64 companies listed, raising a total of nearly R$29 billion in capital. Several factors are now contributing to the growing perception that Brazil's IPO party which began in 2007 may be coming to an end, according to the Brazilian economic magazine Revista Capital Aberta. For one, many of those 64 companies performed poorly after listing. That, combined with the 2008 global financial crisis, has made investors a bit more cautious about Brazilian IPOs. Since then, other countries such as Mexico, Turkey and even Peru have become more interesting to investors, diverting capital away from the Brazilian market. In addition, Brazil's fixed income investments have become more attractive as the government continues to raise its Selic benchmark interbank lending rate in an effort to take the wind out of inflation. Even still, a number of Brazilian IPOS are planned for this year. Some might have better luck than other. Those in infrastructure-related sectors might do well, as the government is pouring money into infrastructure in the run up to the 2014 World Cup and 2016 Olympics to be hosted in Brazil.
Comments and questions: phillip@brazilbusinesstoday.com
Currently living in Brazil, Phillip Lee has an MBA in Finance and International Business and has had a distinguished twenty-year career in mergers & acquisitions, strategic market entry and financial management in some of the world's fastest growing economies.
