Window for follow-ons remains open and IPOs may occur – 07/21/2023 – Market

Executives in the capital markets area remain positive in relation to the offering of shares by Brazilian companies this year, even after a warm second quarter and a busy start to the semester, reflecting an improvement in the country’s risk perception.

For now, however, subsequent offerings should prevail, although initial stock offerings, the IPOs, are not ruled out, especially at the end of the year.

According to an estimate by Roderick Greenlees, global head of the investment banking area at Itaú BBA, who claims to be constructive with the scenario, 2023 should end with between 25 and 35 operations (follow-ons and possible IPOs), something in the order of BRL 40 billion to BRL 50 billion.

This year, after an operation in the first three months of 2023, in March, the period from April to June had eight subsequent share offerings and the current month has already registered another four follow-ons.

Assaí, Hapvida, Dasa, Orizon, Smartfit, Oncoclínicas, CVC Brasil, Localiza, Vamos, Direcional, Hidrovias do Brasil, BRF and MRV&Co accessed the capital market.

The total volume of operations, according to B3 data and from company announcements, reaches BRL 22.3 billion. In the entire year of 2022, there were 19 operations, which added up to R$ 57.7 billion, with the capitalization of Eletrobras alone accounting for 33.7 billion of this total. There were no IPOs.

This year there were operations with only primary or secondary offerings or involving both. There were also businesses in which the controlling shareholder accompanied contributions, others that served to the exit of shareholders with relevant participation. Companies also took the opportunity to seek resources to improve their capital structure and reduce debt, while others aimed at expansion.

WINDOW STILL OPEN

Greenlees reckons there should be one or two more trades using first-quarter results between July and August, with follow-ons potentially coming back later next month or September after the second-quarter earnings are published and the Northern Hemisphere vacation is over.

“Companies that have projects or that want to leverage themselves will not wait… we have no reason to foresee a closing of this window”, stated the executive.

In the same direction, Pedro Leite da Costa, responsible for the Capital Markets area at Santander Brasil, says he does not see any trigger that indicates the non-continuity of this tone in operations. He sees the possibility of ending the year with something between 30 and 35 operations.

In the background of the offers, there is an improvement in the Brazilian scenario in recent months, including easing inflation and advancing the agenda in Congress, notably the new fiscal rule and the Tax Reform, in addition to the consolidation of bets that the Central Bank should start cutting the Selic rate in August.

According to Marcello Lo Re, responsible for the capital markets and variable income operations area at Morgan Stanley in Brazil, this “acceleration” in follow-ons activity follows a movement already seen in the North American market and is supported by the recent behavior of shares on B3.

“Better prices are more inviting,” he said, noting that it is not just a question of higher prices, but also better multiples.

In recent months, the São Paulo stock exchange has shown a robust recovery, with the Ibovespa accumulating a 15.9% appreciation in the second quarter. From the intraday low of the year in March, of 96,996.84 points, to the high so far in June, of 120,518.52 points, the high exceeds 24%.

Among the shares of companies that went on the market, ten had accumulated until the day before appreciation in relation to the price set in the offer. Compared to the Ibovespa, in the same period, nine companies performed better.

“The offers are generating results” stated Costa, from Santander Brasil. “That, to me, is the most important point of all. […] Success breeds success, attracts more funds to look at other opportunities,” he added.

Executives reported that they have been highly sought after by companies from different sectors, including infrastructure, health, energy, education, capital goods, among others, seeking to capitalize, take advantage of the window. One of the operations widely expected for the year is the capitalization of Copel.

The electricity company from Paraná has recently estimated a quick progress of the discussions in the control bodies TCU and TCE-PR, considered the main pending issues for the launch of the share offering that will lead to the privatization of the company, although there is still no closed schedule.

A good part of the cast that did the follow-on this year signals a more restrained performance by investors, who have opted for shares in larger, more liquid companies, leaders in their segments, aiming at profitability in the short term, not the future.

“We are much more interested in offerings today than we were two years ago,” said Pablo Riveroll, Schroders’ equity director for Brazil and Latin America, adding that the manager has participated in some of the last follow-ons, albeit in a limited way.

Riveroll said that Schroders, which has BRL 16 billion invested in shares of Brazilian companies, is looking for sectors that have been consolidated, which have seen a drop in competition since the pandemic, companies that are leaders in their segments, which may, with the expected recovery of the economy, gain market share.

Still according to Riveroll, Schroders has participated in operations to strengthen the balance sheet of companies that believe they can use the resources to accelerate growth.

IPOS IN THE 4TH QUARTER

With regard to IPOs, Greenlees, from Itaú BBA, believes that if the follow-ons maintain the recent performance, it will be possible to make the first initial stock offerings possible in the fourth quarter. He calculates that there will be operations smaller than R$ 1.5 billion and that there will be more selectivity.

“It won’t be like the last boom we had, with all sectors, sizes […] they will be operations that will have liquidity”, he said. “A lesson that the market has learned is that smaller operations generate less liquidity, which is bad at a time of market retraction, because you can’t get out of the position very easily.”

In 2021, there were 46 IPOs and the roles of several newcomers suffered, amid a worsening political and fiscal scenario in the country and concerns about the pace of world growth. March of that year also marked the beginning of the monetary tightening cycle in Brazil. The Ibovespa dropped almost 12% in 2021.

Costa, from Santander Brasil, stated that he believes that there will also be IPOs, but few, this year. He assesses that this movement will depend a lot on the performance of the Brazilian stock exchange, how much the shares can still rise, what the reaction will be to the Central Bank’s decision on interest rates on August 2nd and what will be the outcome of the Copom meeting in September.

“If the stock market reacts well, I think we could see some IPOs. A handful [de IPOs] I think it’s quite possible”, he estimated.