Petroleo Brasileiro SA, Brazil’s state-run oil company, is luring investors to its $25 billion share sale, the biggest in the Western Hemisphere since 1999. Latin America’s worst-performing stock market is no better off.
“It’s going to make life a bit harder for companies looking to go to the market as the liquidity might not be there,” said Nick Robinson, who manages $20 billion in emerging market assets at Aberdeen Asset Management Inc. in Sao Paulo.
Aberdeen, Lord Abbett & Co. and Petercam SA, all Petrobras shareholders, said they may buy more stock as the world’s fourth-largest oil producer by market value seeks to finance a $220 billion investment program. Speculation the sale will take place as early as June may have contributed to several Brazilian initial public offerings this year raising less than they originally sought, said Paul Capital Partners in Sao Paulo. Brazil’s IPOs have underperformed offerings in Russia, India and China once the shares began trading.
Five of the seven Brazilian initial sales this year raised less than they originally sought. Brazil’s benchmark Bovespa index is down 1.5 percent this year, compared with a 1.8 percent gain in Mexico’s IPC index and 3.3 percent advance for Argentina’s Merval.
Petrobras Chief Executive Officer Jose Sergio Gabrielli, 60, said on March 24 that the sale may raise $15 billion to $25 billion from minority shareholders. Credit Suisse Group AG of Zurich said the company may raise $20 billion to $25 billion, according to a note to clients on April 15.
‘Clearing the Decks’
“People generally want to participate in it and it’ll clear the decks a bit,” said Craig Shaw, who helps manage $7 billion in assets at Harding Loevner Management in Somerville, New Jersey. Harding owns Petrobras shares. “Getting the big fish out of the way may make it easier to get new listings in front of investors. That is, if they have the money.”
Petrobras slipped 0.7 percent to 32.80 reais today, while the Bovespa stock index dropped 0.7 percent.
At $25 billion, the sale from Rio de Janeiro-based Petrobras would be equal to about 2 percent of the $1.26 trillion market capitalization of all publicly traded shares in Brazil, according to data compiled by Bloomberg. That would be equal to about a $295 billion offering in the U.S. equity market, which has a total value of almost $14.8 trillion.
Bank of America Corp. of Charlotte, North Carolina, raised $19.3 billion last year in the biggest sale of stock or preferred shares by a publicly traded U.S. company, according to Bloomberg data going back to 1999. San Francisco-based Visa Inc.’s $19.7 billion initial offering in March 2008 was the largest IPO by an American company, Bloomberg data show.
Government Approval Needed
Petrobras is seeking to offer 68 percent of new shares to existing shareholders with the government buying 32 percent in a swap for 5 billion barrels of oil reserve, at a price dependent on how the government values the crude, according to Petrobras’s Web site. The government and investors have the option to buy a bigger stake should some shareholders not participate.
Brazil’s Congress must approve the plan. The sale may be completed by the end of July, said a Petrobras official who declined to be named in accordance with company policy. The government expects the Senate to back the bill by Petrobras’s timetable, Helio Sa, an official with the Senate’s government leadership office, said in an interview. President Luiz Inacio da Silva’s press office said they expect Congressional approval by the end of May.
The largest publicly traded Brazilian company with a market value of 309 billion reais ($178 billion) plans to spend $200 billion to $220 billion through 2014, the world’s biggest oil- industry investment program, making the capital increase “indispensable,” Gabrielli said at a press conference on April 12.
Doubling Production
Petrobras aims to more than double oil production to 5.7 million barrels a day by 2020. Royal Dutch Shell PLC, Europe’s biggest oil company, and Exxon Mobil Corp., the largest U.S. oil company, “would kill” for the output growth Petrobras will have over the next 20 years, said Harold Sharon, an international money manager at Lord Abbett, which oversees $100 billion.
Petrobras, whose shares have dropped 38 percent from their 2008 peak, is trading at 9.9 times earnings. That compares with a ratio of 15.2 for Irving, Texas-based Exxon and 13.2 for Shell. Sharon said Petrobras may offer shareholders a discount of as much as 10 percent below the stock’s 30-day average closing price to lure investors.
“There will always be ways to fund a compelling idea,” Sharon said. “Shaking out $25 billion from the world financial system can be done for a world-class company.”
Selling for Petrobras
Johan Van Geeteruyen, who helps manage 14 billion euros ($18.5 billion) at Petercam in Brussels, said he sold solar- energy companies to raise cash to buy Petrobras, which has a better “track record” than Brazilian offerings this year such as billionaire Eike Batista’s OSX Brasil SA.
OSX of Rio de Janeiro raised $3.9 billion less than it initially sought in the share sale on March 18. Batista called off plans to take EBX public a month later after four Brazilian share sales priced below their anticipated range. OSX has plunged 26 percent from the initial price of 800 reais. “It’s a lot of new product for the same set of takers so maybe they’ll be some stepping back,” said Duncan Littlejohn, who helps manage $1.6 billion in global private equity funds at Paul Capital.
Economic Expansion
Profit at Brazilian companies may increase 29 percent this year and 24 percent in 2011, New York-based JPMorgan Chase & Co. said in an April 19 note to investors. U.S. companies in the Standard & Poor’s 500 Index are projected to increase earnings per share 31 percent this year and 19 percent next year, according to estimates compiled by Bloomberg.
Latin America’s largest economy is forecast to expand 6 percent this year, the most since 2007, after shrinking 0.2 percent in 2009, according to an April 26 central bank survey of economists.
The Petrobras deal “could be great for sentiment if it is enthusiastically taken up by all the market participants,” said Christopher Palmer, who oversees $5 billion as the head of global emerging market stocks for Gartmore Investment Management in London.
At least seven more companies are planning share sales this year including Brasilia-based Banco do Brasil SA, Latin America’s largest lender by assets.
Brazil IPO Performance
Brazilian IPOs have beaten the Bovespa by 0.3 percentage points in their first month of trading this year, the worst performance among the fastest developing economies of Russia, China and India, data compiled by Bloomberg shows.
Offerings in Brazil have suffered because companies asked too much for their shares, Arminio Fraga, 52, chairman of Sao Paulo-based BM&FBovespa SA and a former central bank president, told reporters in Rio de Janeiro on April 13.
As interest rates rise and the October presidential election to replace Lula draws nearer, demand may also weaken for Brazilian shares, according to JPMorgan, which cut the nation’s stocks to “underweight” from “neutral” on April 19. The central bank raised borrowing costs for the first time since 2008 this week.
“The market wants clarity on interest rates, the capital raising of Petrobras and about who will be the next executive in Brasilia,” said Roberto Lampl, who helps manage $35 billion in assets at Baring Asset Management in London, which owns Petrobras shares. “This is causing the overhang.”
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