Brazil’s strongest year for initial public offerings since 2013 finished on a flat note this week as one company cancelled its plans and what promised to be 2017’s biggest listing priced at the bottom of the range.
Investors were hungry for shares of a Burger King franchisee and ploughed enough money into the country’s main fuel distributor to raise a combined 7.2 billion reais ($2.2 billion) this week, the busiest for new listings in Brazil since April 2013.
Yet the mixed results underscored the finite appetite for new offerings as well as rising anxiety about an unfinished economic agenda and unsettled political outlook.
Brazil’s benchmark Bovespa stock index.BVSP hit a record high earlier this year as the nation emerged from its worst recession in decades and President Michel Temer promised a series of market-friendly reforms. Ten IPOs raised $5.55 billion, compared with $8.35 billion from nine in 2013.
Petroleo Brasileiro SA raised 5 billion reais from listing subsidiary Petrobras Distribuidora SA, but investors said demand was tepid.
Pricing at the bottom end of the target range of 15 reais to 19 reais, Petrobras Distribuidora’s enterprise value equalled around seven times earnings before interest, tax, depreciation and amortization. This was below the 11.4 multiple for private rival Ultrapar Participações SA.
“Of course, in a better macro environment, the transaction would have been larger,” said a person at the state oil company.
Taking out some of the sting, shares of the fuel distribution unit rose 6.7 percent to 16 reais in their debut on Friday.
“Petrobras decided to price it on the low end to get quality investors, long-only funds and not a lot of shorter-term hedge funds,” said one person with knowledge of the process.
Investor enthusiasm for the offering had waned in recent months as it became clear that the government would not sell enough shares to give up control of Petrobras Distribuidora.
“Political risk is much higher in a state-controlled company, considering the upcoming presidential elections,” said one investor who bought into the IPO.
Uncertainty surrounding next year’s wide-open presidential elections has kept a lid on investor optimism.
Neoenergia SA, a power utility controlled by Spain’s Iberdrola SA, cancelled its IPO planned for Thursday when shareholders refused to cut the price target.
A partner at a major fund cited an abundance of other IPOs: “Investors do not have the capacity to analyze that many offerings, so they have to make choices. This could have been successful if there weren’t so much competition.”
Another fund manager said valuations were too high for investors comparing IPOs across countries.
Banco do Brasil, one of the main shareholders, wanted at least eight times Neoenergia’s EBITDA. CPFL Energia SA, which China’s State Grid bought last year, has a multiple of nine.
APPETITE FOR BURGER KING
The strongest issue was an offering by Brazilian Burger King operator BK Brasil Operação e Assessoria a Restaurantes SA, which priced its offering at the top of the suggested range and will start trading on Monday.
That IPO “offers the only opportunity for investors looking to buy into the rapidly growing fast-food sector in Brazil,” said the first fund manager.
Brazilian billionaire Jorge Paulo Lemann’s 3G Capital, which controls Burger King Corp through Canada’s Restaurant Brands International Inc, owns a 13 percent stake in the company. Investors also considered 3G’s history of efficient management, the fund manager added.
BK Brasil is controlled by investment firm Vinci Partners Ltda, led by former banker Gilberto Sayão.
Investors also bought into BK Brasil’s strong growth record, which has been higher than local franchisees of rival McDonald’s Corp.
Optimism about BK Brasil’s expansion prospects lifted its offering price to 12.5 times EBITDA, compared with listed rival Arcos Dorados Holding Inc’s 8.2 multiple.
This year’s string of IPOs is likely to extend into the first months of 2018 as companies rush to avoid the expected pre-election volatility.
“We expect a smaller volume of share offerings next year than in 2017,” said Roderick Greenlees, head of investment banking at Itaú BBA SA. “As is common in election years, markets will be more active in the first half.”
Algar Telecom, which postponed plans last month to avoid being crowded out on the busiest week of the year, is planning a January IPO. The listing of payment processor PagSeguro and a follow-on offering from airline Gol Linhas Aéreas Inteligentes SA may follow, Reuters reported.
“Investors are selective but enthusiastic about companies with a good track record of earnings, consistent growth perspective and committed shareholders”, said Leandro Miranda, head of investment banking at Banco Bradesco SA’s Bradesco BBI unit.
Foreign investors’ share in Brazilian IPOs is growing slowly and reached around 60 percent in recent transactions, he added.
Private research shows Latin American-dedicated funds’ allocation in Brazil is below historical levels, suggesting a potential to grow even after 10.3 billion reais worth of net inflows into stocks this year.