October 4, 2013 / 5:18 PM / 4 years ago

ANALYSIS-Mexican pension funds, reforms fuel record stock listings

By Gabriel Stargardter and Elinor Comlay
    MEXICO CITY, Oct 4 (Reuters) - After years in Brazil's
shadow, Mexico's stock market is enjoying a listings boom,
fueled by hopes of economic reforms and strong demand from
pension funds breathing life into a long-stagnant market.
    From airlines to banks, Mexican companies have raised $9.8
billion this year - more cash than the previous four years
combined. That is just $1.1 billion shy of the total issuance in
regional powerhouse Brazil, which has an equity market more than
twice the size of Mexico's, during the same period.
    And with various initial public offerings (IPOs) and
follow-on listings worth $1 billion announced in the last two
weeks, experts say the momentum will continue if the clutch of
economic reforms being pushed by President Enrique Pena Nieto
bears fruit.
    The pace of listings is expected to ease following the
Mexican economy's contraction in the second quarter. But demand
for companies seen offering diversification and growth in a
market that has been starved of new stocks in recent years
should remain firm, investors say.
    "I've been in this business 20 years and it's the first time
I've seen it like this," said Citigroup's head of investment
banking for Mexico, Alfredo Capote. "The opportunities for
growth are among the best in the history of this country."
    Solid domestic demand from pension funds that are feeling
increasingly comfortable buying individual stocks persuaded
companies such as dairy producer Lala and budget airline Volaris
to list.
    "Mexican companies ... see growth opportunities and they
want to increase their capital base," Luis Tellez, chief
executive of Mexico's stock exchange, told Reuters this week.
 
    Budget airline Volaris, which went public last
month, was among the companies driven to sell stock, which it
did in order to invest in new routes and expand, Chief Executive
Enrique Beltranena told Reuters. 
    Beltranena said it seemed like a good moment since there was
great interest in Volaris' offering, which was three times
oversubscribed and attracted mostly institutional investors.
    Up to five more companies could announce listing plans this
year, Tellez said.
    Among the recent rash of IPO applications in Latin America's
second largest economy is dairy company Lala, which had toyed
with the possibility of going public for years, and last week
said it will list its shares. This week it said the deal could
raise up to $980 million. 
    Just days later, Mexican conglomerate Alfa said
it is planning to list its food unit Sigma Alimentos.
    Mexico's nearly $400 billion equity market, with about 100
listed shares, is well behind Brazil, which has a market
capitalization of $822 billion and twice as many listed shares.
    Looking at just IPOs this year, Brazil is also ahead of
Mexico with 6 deals raising $7.6 billion, while Mexico has had 7
deals raising $3.2 billion, according to Thomson Reuters data.
    But companies going public in Mexico have raised more than
six times that raised by their peers in Russia and India this
year, Thomson Reuters data show.
 
    Brazil's Bovespa, which attracted high levels of foreign
investment, particularly in 2007 when it saw a rash of IPOs, has
seen a decline in issuance over the last few years.
    The Bovespa has underperformed Mexico's IPC index this year
and investors have lost money on many of those 2007
IPOs. 
    Mexico is benefiting from domestic demand in the form of
local pension funds (afores), which experts say give a solid
foundation to the current equity boom. 
    The afores have "provided the market with a pool of
liquidity that didn't exist four years ago," said Jaime
Martinez-Negrete, head of Morgan Stanley in Mexico.
    The afores currently invest about 9 percent of their 1.9
trillion pesos ($149 billion) in Mexican stocks.
    That is up from 8.1 percent in 2009, when regulators first
allowed them to invest in Mexican IPOs. However, the pension
funds' asset base is up some 120 percent since then. 
    
    REFORMS
    Mexican IPOs also got a boost last year with the election of
Pena Nieto, who is trying to push through a series of
market-friendly reforms to revamp Mexico's energy and telecom
sectors and to increase paltry tax revenues.
    The local unit of Sempra Energy, gas pipeline
company IEnova, is up more than 50 percent since
listing in March, with investors drawn to a previously closeted
sector.
    Energy reform will lead to listings from "a surprising
number of companies," said Citi's Capote, who also sees more
Mexican tech and transport companies going public in the future.
    The reforms also aim to rein in some of Mexico's most
powerful businesses, like billionaire Carlos Slim's America
Movil, leading investors to look more kindly on
companies and sectors that offer new investment opportunities. 
    "The Mexican market is still very concentrated in large-cap
companies and it should be more diversified, with more names and
many more industries involved," said Jaime Alvarez, chief
investment officer at Principal Financial Group's $10 billion
afore in Mexico City.
    This investor demand coincides with cultural changes in the
boardrooms of Mexico's many family-run companies.
    Executives are now considering passing on liquid assets to
their children rather than just control of the family company,
said Jorge Juantorena, a partner at Cleary Gottlieb law firm who
has worked on most of the Mexican IPOs this year.
    Another factor driving new listings is Mexico's growing
private equity sector, which has expanded by nearly 50 percent
since 2000 to total $14.6 billion last year.
    Private equity companies were behind the IPO of low-cost
airline Volaris, whose shares have risen 27 percent since it
went public last month.
    To be sure, not all of Mexico's IPOs have outperformed the
market this year.
    A sudden vogue for real estate investment trusts, known as
FIBRAs, stoked listings but the increasingly saturated market
has led to poor returns in recent months.
    Slim's cafe and retail business Grupo Sanborns 
is down 4 percent since listing in February - although that is
still better than Mexico's benchmark IPC index, which is
down 8 percent over the same period.
    The example of Brazil, where valuations soared out of
control and a series of deals failed to make good on promised
returns, also looms large.
    Only 37 of Brazil's 117 IPOs since the start of 2005 have
yielded returns above the benchmark CDI interbank lending rate,
a recent Credit Suisse presentation showed. 
    Among the worst performers is Brazilian tycoon Eike
Batista's OGX Petroleo e Gas Participacoes SA, which
has lost more than 90 percent of its value since listing in June
2008 as it fails to pump enough oil to cover debts.
    A year ago, Batista was one of the world's richest people
with a fortune close to $35 billion, which has all but
evaporated as his EBX mining to energy conglomerate collapsed.
    A Reuters study of 28 of Mexico's IPOs since 2005 showed a
mixed success rate, with just shy of two thirds of the companies
above their listing price.
    Spanish bank Santander's Mexico unit 
was up about 15 percent since listing a year ago, while Mexico's
biggest airline, Aeromexico, has fallen more than a
third since its 2011 IPO.
    However, experts say certain differences between Mexico and
Brazil, such as the former's proximity to an improving U.S.
economy, should prevent the country from experiencing a meltdown
on the same scale as Brazil's.
    Investors and bankers surveyed by Reuters said they expected
a slight slowdown in the pace of equity offerings next year, and
expect a slew of companies to spin off subsidiaries. Grupo
Mexico is mulling listing its ITM trains unit.
    "How many years has it been since we've really had IPOs in
Mexico?" asked Stacy Steimel, managing director of PineBridge
Investments Latin America. "I think there are a lot of good
companies in Mexico that could come to market."

 (Reporting by Gabriel Stargardter and Elinor Comlay; Editing by
Simon Gardner, Kieran Murray and Phil Berlowitz)

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