| SAO PAULO, Sept 2
SAO PAULO, Sept 2 Brazil's long-dormant equity
capital markets could be set for a revival in the coming months
that might help offset slower-than-expected merger and
acquisition activity, bankers said.
Growing appetite for risk among local investors and
expectations of a more business-friendly government after the
ouster of former President Dilma Rousseff could help resuscitate
a market that has seen only one initial public offering over the
past 23 months, the bankers said. That compares with 10 over the
previous two years.
While IPOs are not imminent, bankers at Itaú BBA SA and
Morgan Stanley say they expect between five and seven more
offerings to take place before year-end.
Brazil's benchmark stock index is up 35 percent this
year, the world's second-best performer, on optimism about
Rousseff's replacement by her former vice president, Michel
Stung by dozens of capital-raising deals that fell short of
promised returns during Rousseff's five years in office, foreign
investors in particular are wary of equity offerings in Latin
America's biggest economy.
However, they could quickly return if Temer effectively
tackles Brazil's budget problems and reignites confidence in the
economy, said Roderick Greenlees, Itaú BBA's global head of
"There is a situation of repressed demand for capital, which
can lead more companies to go ahead with their offering plans,"
Greenlees said in an interview, suggesting there is pent-up
appetite for such deals.
A renewed flow of equity offerings could lead to the
reworking of some M&A deals now being negotiated, according to
bankers including Marcus Silberman, head of Brazil M&A at Bank
of America Merrill Lynch.
The equity market's revival comes after dozens of M&A deal
talks ran aground in recent months as buyers and sellers split
over valuations and worried that the nation's political crisis
could trigger regulatory or tax changes.
One example is homebuilder Gafisa SA, which is leaning
toward listing low-income home unit Construtora Tenda SA rather
than selling part of it to a partner in the belief that an IPO
could fetch more, people told Reuters last month.
Likewise, Carlyle Group LP and CVC Brasil Operadora SA
founder Guilherme Paulus' failure to find a buyer for
their majority stake in the travel agency led them to sell part
of their holdings through a public offering.
M&A transactions accounted for half of Brazil
investment-banking advisory fees over the past four years. In
the past year, equity underwriting fees in Brazil have fallen
more than 50 percent to $51 million - an amount equivalent to a
quarter of M&A advisory proceeds in the same period, Thomson
Reuters and Freeman Consulting data show.
Itaú BBA, Brazil's largest investment bank, expects
companies to raise up to 10 billion reais ($3.1 billion) this
year from offerings.
In many cases, companies raising new equity will do so while
at the same time exploring a full or partial sale to a strategic
buyer, Bank of America's Silberman said.
Access to funding will also help cash-strapped companies
raise capital at a time when bankruptcy filings have hit a
record. Others view offerings as a way to fuel expansion as the
country's economy revives.
Still, increased offerings may be a mixed blessing for
private equity funds, said Eduardo Miras, co-head of Brazil
investment banking at Morgan Stanley.
"Although private equity sponsors may have to pay more to
invest in companies, active public equity markets give them an
additional alternative for divestments," he said.
BRF SA's Middle East-based food processor Sadia
Halal, and medical imaging provider Centro de Imagem
Diagnósticos SA, which filed for an IPO this week, are among
candidates for listing debuts. Call center firm Contax
Participações SA also recently filed to sell shares in a private
According to bankers, the return of cash-flush foreign
investors is a necessary condition for the success of offerings
Companies and shareholders raised about $1.9 billion from
Brazilian follow-on offerings this year, according to Thomson
Reuters and bourse operator BM&FBovespa SA data. The number does
not include private placements and restricted-efforts deals.
Last year follow-ons and IPOs raised over $5 billion.
The value of Brazilian corporate takeovers fell 11 percent
to $21 billion in the year through Aug. 31 from the year-earlier
period, while the number of announced M&A transactions slumped
16 percent from a year ago, Thomson Reuters data show.
($1 = 3.2272 Brazilian reais)
(Additional reporting by Robert Levine in New York; Editing by
Christian Plumb and Bill Rigby)