beyondbrics

By Iona Teixeira Stevens and Pan Kwan Yuk

So much for an end to Brazil’s IPO drought.

After a lacklustre second-half in 2011, hopes were high that the rally seen in the Brazilian equities and bond markets since the start of the year would lead to a similar revival in equity capital raising. The signs looked encouraging enough: Brasil Travel, a retail travel chain and Seabras, the local division of Norway oil driller Seadrill both announced headline-grabbing IPO plans last month.

But Seabras soon delayed its proposed R1.7bn offering for technical reasons and on Thursday, uncertainty clouded Brasil Travel’s listing, with two reports saying the IPO had been pulled.

From Reuters:

Tourism company Brasil Travel Turismo and its shareholders dropped plans to sell shares in an initial public offering, in what could be seen as a chilly start of the year for share offerings in Latin America’s largest economy.

The São Paulo-based company, which originally sought to raise as much as R$1.45bn ($842m) from the sale of new shares, asked regulators late on Thursday to cancel its request to become a publicly listed company.

Sources told International Financing Review and Reuters that the deal, which, if priced, could have been the first IPO in Brazil this year, floundered due to lack of investor demand.

If true, this would deal a huge blow to Brazil’s long-suffering IPO market. After hitting a record level in 2007 of $32.1bn, Brazil’s IPO’s volumes have fallen sharply since. Last year, volumes reached only $4.4bn, down 31 per cent from 2010, according to Dealogic.

A cancelled IPO would also be a bit of an embarrassment for Eduardo Refinetti Guardia, BM&FBovespa’s chief financial officer, who predicted this week that IPO offerings in Brazil could total as much as $28bn this year.

Yet as Reuters noted:

The failure of the Brasil Travel IPO signals that investors, who last year steered clear from those deals as Europe’s debt crisis worsened, will keep shunning companies with great ambitions but an insufficient track record, poor earnings visibility or that could be vulnerable to a downturn.

Any lack of demand for Brasil Travel’s offering will be all the more concerning considering the booming fundamentals of Brazil’s travel market, with millions of consumers from the new middle classes boosting the industry.

Even before Thursday’s reports, concerns were being raised by investors that they were potentially being sold a dud.

According to this report from Euromoney last week: “The deal has, according to some, the feel of rushed opportunism.”

Questions have been raised about the complex structure of 35 companies, and the accounting and financial statements supplied to prospective investors. There are reports that audited numbers are being added to rough numbers, and so the utility of the totals is being questioned.

Investors also tell Euromoney there is no clear incentive plan about how to align the various companies’ performance and maximise corporate earnings.

There’s more:

Trying investors’ patience further, Flow Corretora is both the financial sponsor and managing the transaction…Even the fee structure is raising eyebrows. Credit Suisse is believed to be getting the lion’s share (circa 75%) of a fee which has been rumoured to be between 5% and 7% – the market norm is between 3% and 4%.

According to Reuters, bankers tried to rescue the deal on Thursday by reducing the suggested price tag from a prior range of R$1,250  to R$1,650 a share to as low as R$850 in order to secure demand. But the manoeuvre appears to have come too little too late if the Reuters and IFR reports are true.

Brasil Travel representatives issued only the following statement on Thursday:

Brasil Travel will issue a formal and definitive statement on its IPO process on Friday, February 10, through its co-founder Pedro Guimarães.

So the market will have to wait until Friday to find out. But for now, the IPO – and along with it Brazil’s aspirations for a better year in equity capital markets – definitely looks grounded.

Related reading:
Brazilian equities burst back into life, beyondbrics
Brazilian bonds and equities: rally time, beyondbrics
LatAm bonds: strong start but can they go the distance?, beyondbrics
Brazil’s IPOs fail to impress, beyondbrics