Last August’s equity offering from Petrobras, Brazil’s national oil company, was a landmark event. It was the largest Latin American equity issue ever, and one of the largest anywhere in the developing world. The issue marked the rise of a new, rejuvenated Petrobras confident of meeting the exacting standards of international financial markets.
Petrobras’s stock was previously listed only in Brazil and its ADR debut provided emerging market investors with improved access to a large, liquid name. The issue increased the company’s public float to 41% of outstanding shares from 13%. The event was also a milestone in the development of an equity culture in Brazil. As such, the transaction qualifies for LatinFinance’s public-sector equity issue of the year award.
The New York listing of Petrobras was the culmination of a long process of reform. Philippe Reichstul, appointed president in 1999, revamped the company’s management structure, brought in senior executives from the private sector and adopted US accounting standards.
Although Petrobras, Brazil’s biggest company, remains under government control, Reichstul says it must act as if it were a private sector company. He says, “We need to raise financing, we need to meet international standards and compete with international companies. We had a long, hard fight to instill new values in the company. These are shareholder value, growth with profits.”
Without radical change, says Reichstul, Petrobras would “sink slowly within 10 years,” battered by competition from global majors in a deregulated home market and denied access to international capital it needs to grow.
The Brazilian government sold its Petrobras shares – equivalent to 28% of common stock – to cut its stake in the company to the minimum legal holding of 50% of voting stock plus one share. Francisco Gros, president of BNDES, the development bank that managed the issue for the government, said the offering underlined official commitment to modernizing Brazil’s equity market: “The signal from Petrobras is clear in this respect. The government will be the majority owner [but] it will be operated for the benefit shareholders and not just the consumer or corporation.”
The successful launch came as a relief the government, which first awarded the mandate in 1998. Successive crises in the emerging markets, including Brazil’s January 1999 currency devaluation, oil industry deregulation and management changes at Petrobras forced the issue to be delayed repeatedly. However, the market outlook improved throughout 2000 and Reichstul’s new management team impressed investors. Ronnie Moreira, the company’s chief financial officer, succeeded in closing a series of complex project finance operations to fund offshore exploration and production. These transactions take our project finance deal of the year prize.
Still, the launch’s timing in early August was inauspicious. Prices had weakened due to investor concern over falling oil prices. Merrill Lynch, which led the offering, priced the shares at $24, a 5.7% discount to the previous day’s close and at the low end of investor expectations. Petrobras later recovered slightly, closing the year at $25.25.
Orlando Muyshondt of Merrill Lynch Asset Management, says “From the point of view of investors, the issue was pretty reasonably priced. The company is still at a substantial discount to comparable oil companies,” he says. A manager at a large international emerging market fund, says, “Management did a great job in convincing the world that it has left its public-sector mentality behind. Overall investors are happy. This is a core holding.”
This was the first time Brazil’s government had structured a major asset sale as a public offering with the clear intention of distributing the shares to Brazilian and global investors, rather than a strategic investor. Retail sales in Brazil, managed by CSFB Garantia, were helped by a 20% discount and a government ruling allowing buyers to use funds held in the FGTS mandatory savings scheme. The number of Brazilian shareholders nearly doubled after the sale.
Mexico’s government took a similar approach to the privatization of Asur, the airport operating company, in a simultaneous offering on the Mexican bolsa and the New York Stock Exchange. In September, it raised $335 million with the sale of 85% of the company in the first Mexican IPO since 1997. The remainder of the stock is held by an operating consortium, which has managed Asur since 1998.
This transaction, led by UBS Warburg, was remarkable for incorporating minority investor protection standards for Mexican investors and for establishing a US-style corporate structure in which no single investor has emerged with a dominant stake. This was the first IPO for a Latin American airport operator and the first to win a NYSE listing. The bookrunners were able to price Asur at $15.125, or at the midpoint of the price range.
The Brazilian and Mexican governments used both these offerings to set new standards for the region’s equity markets. Companies are likely to find it less easy to justify over-aggressive pricing and disadvantageous ownership structures to investors in forthcoming issues.