Brazilian IPOs: New wave for the Novo Mercado
NATURA, a company that sells cosmetics door-to-door Avon-style, started the fashion. Its initial public offering (IPO) in May 2004 was the first in Brazil in more than two years. Since then, 18 companies have made their debuts on São Paulo’s stockmarket, the Bovespa. Another score are expected to do so by the middle of this year. The newcomers are not only adding variety to a market ruled by banks, extractors of raw materials and state-owned companies; more important, they herald a change in Brazil’s investment culture. Equities are gaining space in a market dominated by government bonds. And old-style corporate governance, in which holders of small financial stakes monopolise voting shares, is yielding to shareholder democracy, where an investment’s size and its voting power go hand in hand.
The debutantes are exploiting a global and seemingly insatiable appetite for Brazilian securities. High-yielding bonds are the main attraction. Those denominated in reais got an extra boost last week when the government exempted foreign buyers from income tax. But equities, already popular (see chart), could become more so as domestic interest rates fall. In Brazil, just 17% of institutions’ assets are held in equities, against 41% in Chile, notes Urban Larson, of the Baring Latin America Fund.
Bovespa’s biggest stocks are a state-owned oil giant (Petrobras), a privatised minerals exporter (Vale do Rio Doce) and a bank (Bradesco), which together account for one-third of the market’s capitalisation. The newcomers are mostly more glamorous, oriented to Brazilian consumers and traded on the Novo Mercado (new market), a democratic enclave within Bovespa that admits companies that issue only voting shares. Before Natura, just two enterprises traded there. Now 21 do, including DASA, a fast-growing chain of medical laboratories, Submarino, an internet retailer, and Gafisa, a home builder anticipating a boost from lower interest rates.
Such companies “are creating a new benchmark for corporate governance in Brazil,” says Cristiano Souza, of Dynamo Asset Management. Under Brazilian law, two-thirds of a company’s equity can be in the form of non-voting preference shares, called PNs, so a financial stake of less than 17%—a majority of the ordinary shares (ONs)—can secure control. (A 2001 law, however, cut the maximum weight of PNs in new companies to 50% and thus, in effect, set the minimum controlling stake at 25% plus one share.) Traditionally, investors did not care, since the more-liquid PNs offer an easier exit in a turbulent market. But after a series of clashes with owners, PN holders now see the value of voting power. One dispute pits ON holders in Ripasa, a paper company, who received a big premium for selling the firm to two competitors, against PN investors, who did not.
Today, any company that does not list on the ON-only Novo Mercado needs a good excuse. One such is Gol, Latin America’s first publicly traded low-cost airline, which is not allowed to sell control to foreigners. It listed on Bovespa’s “level 2,” which requires “tag-along rights” in takeovers for PN investors and refers disputes to arbitrators rather than to Brazil’s slow courts. Few would dare offer less. Companies on the Novo Mercado and level 2 are trading at nearly double the price of the rest as a multiple of expected 2006 earnings, says Mr Souza, although this partly reflects the sectors these companies are in.
They are spawning imitators. In January Embraer, Brazil’s aircraft manufacturer, said it would list its Brazilian shares on the Novo Mercado. Rossi Residencial, a home builder, followed and Perdigão, a meat company, is set to be next. Increasingly, that is a first step towards dispersing control. So far just two companies on the Bovespa—Lojas Renner, a retailer, and Eternit, a building-materials firm—have no controlling shareholder. They will soon be joined by Submarino, DASA and Perdigão (plus Embraer, though the government will retain a takeover-busting golden share). Widely held companies are more vulnerable to hostile takeover bids—a spur to managers and a boon for shareholders.
Optimism may now be tipping into hubris. Earlier IPOs were at “big discounts to international peers,” says Mr Larson, but the most recent look expensive. Investidor Profissional, an asset manager that buys under-valued shares, has no big investments in the recent wave of IPOs. It prefers neglected companies, some in dowdy sectors like textiles. After all the excitement, boring may become beautiful.
Article source: http://www.economist.com/node/5563405?fsrc=rss