Brazil slips in emerging market stock offerings

Lack of IPOs and minimal activity sees Brazil fall from 3rd to 7th in rankings dominated by India and China

06/24/2024

Hans Lin — Foto: Carol Carquejeiro/Valor

Hans Lin — Foto: Carol Carquejeiro/Valor

The sluggish activity in the Brazilian equities market has caused Brazil to drop positions in the ranking of emerging countries. According to data from Dealogic, Brazilian companies have raised only $2.1 billion from stock offerings this year, including block trades.

This total places Brazil in seventh position among non-mature economies, with India leading at $21.5 billion, followed by China with $19.7 billion. The figures account for the year to date up to the 14th, with Brazil’s share of the total emerging market offerings standing at 0.8%.

In 2023, a notably weak year for the industry, Brazil was ranked third among emerging countries, managing to raise $9.5 billion from January to December. China was the leader that year. In 2022, Brazil held the fourth position, trailing China, India, and South Korea, based on Dealogic’s global data collection on capital market activities.

According to B3, the financial volume of issuances this year has halved compared to the same period last year, focusing solely on the Brazilian market.

Furthermore, Brazil is nearing a milestone of three years without a new company debut on the local stock market—a scenario unprecedented in at least the last three decades. Market sentiment increasingly suggests that initial public offerings (IPOs) may not resume until 2025.

Market sources consulted by Valor indicate that the volatility of the Brazilian market and the uncertain outlook for the country’s fiscal health have heightened risk aversion. This cautious stance has not only deterred new IPOs but also affected additional stock offerings from already listed companies, known as “follow-on” offerings. Notably, there have been no such transactions in the country for about two months.

At the beginning of last year, the market for follow-on offerings shut down for two months following the Americanas scandal but reopened in the second quarter as companies in need of capital began to reengage with investors. Currently, however, heightened risk aversion has prompted companies to shore up their finances through private capital increases instead.

Industry insiders point out that another deterrent to new market activities is the disappointing performance of stocks from companies that conducted follow-on offerings earlier this year, resulting in losses for investors.

The only significant offering anticipated this year is the privatization of Sabesp, which is expected to generate upwards of R$15 billion. This transaction is likely to attract a strategic investor to purchase a substantial share block, designed meticulously to mitigate market volatility. Investment bankers note that if market conditions improve in the latter half of the year, activity could pick up. However, the focus on this multibillion-dollar deal has dominated market efforts and sidelined other potential offerings, which may have to delay their plans.

Despite the deteriorating local situation, Roderick Greenlees, the global head of investment banking at Itaú BBA, points out that the main hurdle to reviving stock offerings in Brazil remains the U.S. interest rate environment. The U.S. Federal Reserve has delayed initiating monetary easing as the American economy shows continued signs of robust activity.

Mr. Greenlees reveals that the bank was poised to execute 10 follow-on offerings, but heightened market volatility and declining stock prices prompted issuers to postpone these deals, awaiting more favorable conditions. “This significant uncertainty has resulted in a waiting game,” he remarks, noting that ongoing redemptions from investment funds are also stifling transaction flows. “There’s no new money entering the market.”

The Itaú BBA executive acknowledges that internal issues have exacerbated Brazil’s competitive stance relative to other emerging markets. Nonetheless, he suggests that only a minor shift, specifically the onset of a decrease in U.S. interest rates, is needed to revive local market offerings. “If the government demonstrates its commitment to fiscal stability, market offerings could rebound very swiftly,” he asserts.

Hans Lin, the co-head of Bank of America’s investment bank in Brazil, notes that in the current climate of market volatility, block sales of shares have become increasingly popular as a strategy to mitigate risk aversion. “We’re observing a more active block market,” he comments. He recalls a recent transaction where the bank facilitated a block sale for the private equity fund Carlyle, which sold its remaining stake in Rede D’Or in an operation valued at R$2.2 billion.

Mr. Lin emphasizes that the market in the United States remains robust, with asset values on the rise. “Investors are concentrated on the American market where they are profiting; there’s no need for them to seek additional risks,” he explains. According to Mr. Lin, the emerging markets that are successfully attracting foreign capital and standing out include India and Mexico.

Victor Rosa, the head of Scotiabank’s investment bank, describes Brazil’s financial market activity as being “hostage” to American interest rates, with investors showing little enthusiasm for the local stock market. This lack of new developments keeps the country in a state of limbo, nearing three years without an IPO. In contrast, Mexico is experiencing a surge in local company offerings driven by the “nearshoring” trend, which aims to bring production closer to consumer markets. According to Mr. Rosa, this will make for a very active year.

Mr. Rosa points out that the real interest rate in Brazil has not been conducive, prompting a shift from fixed to variable income investments, thereby constraining the influx of new capital. On a positive note, he highlights that the few offerings that do occur are from companies seeking capital for investment rather than merely adjusting their balance sheets, marking a shift from last year’s primary fundraising motive.

*Por Fernanda Guimarães — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Brazilian fintechs bet on expanding to Mexico

Mexican market experiences a boom, attracts Brazilian firms’ investments

06/24/2024

Nubank’s Cristina Junqueira — Foto: Carol Carquejeiro/Valor

Nubank’s Cristina Junqueira — Foto: Carol Carquejeiro/Valor

Brazilian fintechs—and even traditional banks—are betting on expanding operations to Mexico. Latin America’s second-largest economy is an obvious destination given its market size, but there are other factors behind the bet.

Mexico has benefited from the U.S. strategy of nearshoring (relocating production chains closer to consumer markets); the country’s financial sector’s regulatory agenda is gaining strength; and it has a largely unbanked population, which translates into a huge growth potential. At the same time, the use of cash remains very strong, for cultural reasons—which can be a hindrance, but also opens up opportunities.

Brazilian digital bank Nubank, which filed for a banking license in Mexico last year, has highlighted the country among its priorities for 2024. Argentina-based Mercado Pago—with its largest operation in Brazil—applied for a banking license in May and cited the Mexican market as an important front for growth. Among Brazilian traditional banks, Bradesco already had a card operation in the country and decided to expand it in 2022, with the acquisition of a Mexican finance company, which was approved in February this year.

According to a study carried out by innovation firm Finnovista in partnership with Visa, at the end of 2023, 773 local fintechs were operating in Mexico, compared to 394 in 2019. The report also indicates that there are another 217 foreign fintechs, most of which are from the U.S., Chile, Colombia, and Argentina. The most representative segments of activity among local financial startups are loans, payments and remittances of funds, and technology for financial institutions. Around 60% of fintechs in Mexico have products and services aimed at the business-to-business (B2B) market.

Another survey, carried out by Bank of America based on data from Sensor Tower, revealed that Mexico has approximately 19 million active neobank users, representing some 15% of the population. The level is similar to what Brazil had in 2018. The percentage in Brazil rose to around 80% in 2021 and has stabilized since then.

Although the Brazilian and Mexican scenarios share some similarities, BofA analysts point out that there are also relevant differences. In Mexico, the adoption of fintechs is growing at a slower pace and there is a higher level of concentration compared to the Brazilian market. According to these data, Mercado Pago and Nubank combined represent around 60% of users. Next are PayPal, Spin, and Hey Banco.

Mexico represents an “almost perfect opportunity” for Brazilian fintechs and banks that seek to take operations abroad, said Daniela Dutra, leader of banking solutions at Capgemini. The country boasts characteristics such as relative economic stability, low banking access, and more recent opening of the financial system, which also means little global competition. At the same time, the level of credit compared to GDP is almost half that seen in Brazil.

Despite the opportunities Mexico brings to foreign companies, there are also challenges, including understanding consumer behavior. “The level of financial education is low and, due to the poor access to banking services, many people have no credit history, which makes credit granting more difficult. There is also poor information regarding fraud,” Ms. Dutra points out.

In an interview with Valor, Cristina Junqueira, co-founder and head of growth at Nubank, points out that Mexico has a GDP per capita approximately 30% higher than that of Brazil and a low rate of financial inclusion, which the bank sees as a transformation potential. Nubank has invested more than $1.4 billion in Mexico and boasts a 7 million customer base. “Mexico is our top priority for this year. We aim to continue expanding our customer base and significantly contribute to financial inclusion in Mexico.”

She points out that some 82% of the Latin American population still uses cash as the top payment method, a huge difference from the Brazilian market, highly digitized with the instant-payment system Pix. On the other hand, smartphone adoption in the region is expected to grow to 93% in 2030, from 79% in 2022. “Despite its particularities, connectivity opens up a huge potential. And that’s where innovations such as instant-payment systems and open banking emerge, with the potential to shift the financial scenario in Mexico.”

In an interview with Valor this month, Mercado Pago senior vice-president André Chaves argued that the firm has a solid starting point in Mexico given its experience in e-commerce. As the level of banking access is low, being able to see consumer behavior beyond banking is a differentiator, he explained. Mr. Chaves added that banks’ biggest competitor in Mexico is cash, so there is room for the expansion of many rivals. “There is large ‘open water’ [to explore]; therefore I think the two [banks] can grow at very accelerated rates without bothering each other. That said, I want to be the one with the most growth,” he said about Nubank.

Daniel Berman, head of sales at Capgemini Brazil, said the Mexican financial segment was slower to adopt innovation and fintechs struggle more to access funds than in Brazil. According to Finnovista data, the second main challenge reported by Mexican neobanks is accessing funds. The first challenge is scaling and internationalizing operations.

The regulatory framework for fintechs in Mexico, implemented in 2018, is seen as an important step for the segment, although there are points requiring attention, according to Brunno Morette, a partner in corporate law and acquisitions at Cascione Advogados law firm. “There are still few allowed activities and a lack of specific regulations,” he pointed out. However, the Central Bank of Mexico (Banxico) and the National Banking and Securities Commission (CNBV) are following the subject closely and innovations are expected ahead.

Mr. Morette also notes that, given the size of Brazil, it is natural that companies focus first on the domestic market before seeking expansion. However, in the case of neobanks, the logic is different. “For fintechs, internationalization is easier and faster. And they will usually look first at neighboring or regional countries.”

Payments and banking platform Dock is among the Brazilian companies eying the Mexican market. In 2021, the company acquired Mexico-based Cacao, focused on card processing solutions. Providing financial services for companies, Dock is present in 11 countries in Latin America and has around 40 clients in Mexico, which represents 10% of the total. “We always had the vision that this is a market with many opportunities. We have been following the regulatory steps since its early movements,” said Anderson Olivares, Dock’s general manager for Latin America, based in Mexico.

Mr. Olivares says there is synergy between the company’s operations in Brazil and Mexico and a lot can be replicated. He points out that the big difference is the regulatory moment of each of the countries. In Brazil, one of the ways in which Dock operates is by sharing its banking license with other companies, the so-called banking-as-a-service (BaaS) model. In Mexico, this format is not yet recognized by regulatory bodies and, therefore, each client needs to have a license. On the other hand, fintechs can share its relationship with card brands to issue credit cards. “The central bank’s agenda is also advancing to increase competition in Mexico,” he adds.

While the Mexican market is new for fintechs, the scenario is different for conventional banks. The market is dominated by foreign players, such as Citi, BBVA, Santander, and HSBC. Still, the favorable moment has boosted the interest of some participants. Bradesco has had a credit card operation in the country since 2010, and two years ago it announced the acquisition of a popular financial institution (SOFIPO), which is similar to a license for operating a finance company in Brazil. At the time, it had some 3 million customers and said its goal was to double this base and increase its portfolio by fourfold in five years.

Alexandre Monteiro, the head of Bradescard Mexico, said the bank expected a faster approval for the deal but had to develop new systems, instead of scaling what it found at the SOFIPO. “The goals we mentioned at the time were based on digital accounts. We continue aiming to grow a lot. We are developing new platforms to compete with the main players and want to offer a world-class customer journey.” He says the current base has 3.2 million credit cards and the credit portfolio grew 15% in the last 12 months, well above inflation, of 4.5%.

He says the Mexican banking system today is similar to what Brazil had five to 10 years ago but expects this difference to shrink. “Mexico started a few laps behind [Brazil] but that gap tends to reduce over time. There is an ongoing cultural change, young people are opening digital accounts as they don’t want to have to go to a [physical] branch,” he said. The executive is based in Guadalajara, where Bradescard is headquartered.

Carolina Fera, vice president of financial services at the local fintech Clip, a card acquirer, is also attentive to the ongoing transformation of the Mexican banking system. Ms. Fera, who is Brazilian, was hired by Clip to help expand the offer, which includes accounts for small businesses. “General Atlantic was increasing investments in Mexico and looked for executives in Brazil, which is the most advanced market in Latin America. That’s how I came to Mexico. I think Brazilian advances have influenced regulation in the entire region,” she said.

However, she points out that Mexican instant systems CoDi (Cobro Digital, for payments), launched in 2019, and DiMo (Dinero Móvil, for transfers), launched in 2023, could be improved to accelerate its adoption, as happened with Pix in Brazil. “Nearly 70% of transactions in the Mexican market are still in cash. These systems aren’t as user-friendly as Pix, as they allow only one type of key to be registered.” She points out that facilitating use with the help of technology is important but the local reality also needs to be observed. “Wanting a fully digital model could be a risk. You can’t go straight from zero to 100%. Human relationships and in-person service are still very important here [in Mexico].”

*Por Por Mariana Ribeiro, Álvaro Campos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Cost of Selic interest rate for companies reaches R$78bn

Amount is more than double Vale’s investment per year; businesspeople criticize Central Bank

06/21/2024

Ricardo Nunes — Foto: Leo Pinheiro/Valor

Ricardo Nunes — Foto: Leo Pinheiro/Valor

Maintaining the Selic policy interest rate at 10.5% per year for as long as necessary to reduce inflation, as indicated by the Central Bank on Wednesday (19), would cost companies billions of reais and could affect long-term investments when businesses are slowly resuming industrial and commercial activities.

Although businesspeople understand the reasons for the end of the rate-cutting cycle, as they see inflationary control as key and have openly criticized the Lula administration’s fiscal laxity, keeping the rate at this level brings a financial cost to companies of over R$78 billion per year, according to estimates made by Paramis Capital for Valor.

The total stock of corporate debt linked to the CDI (the interbank deposit rate, used as an investment benchmark in Brazil) is currently at R$743.2 billion and, with a 10.5% per year Selic, the impact on companies reaches R$78 billion per year. The amount is equivalent to more than double the investments planned by Vale in 2024 and 70% of the average to be allocated annually by Petrobras from 2024 to 2028.

If the policy interest rate could end the year at 9%, as the market had estimated less than six months ago—before concerns about inflation increased and the government eased its discourse on austerity in public accounts—, the cost to companies would be R$66.9 billion, or R$11.1 billion lower than the current impact.

With the Selic at 9.5%, the interest rate burden would be R$70.6 billion annually, R$7.4 billion lower than the current impact. Brazil has the world’s second-highest real interest rate, only behind Russia. That hinders funding and postpones projects by companies carrying debt linked to the CDI—most of them.

For Ricardo Nunes, the head of credit investments and wealth at Paramis, Selic above 10% could delay projects and slow down companies’ growth. Trade associations and businesspeople have echoed the concerns, criticizing the end of the Selic cutting cycle and uncertainties in the fiscal and political fields. “We think the Selic will be held at 10.5% until year-end, and we do not rule out a possible increase. There is political noise and, if the government adopts a more populist tone, this could further increase the political and fiscal risk,” Mr. Nunes said.

Leonardo Silva, competitiveness coordinator at ABIMAQ, an association representing the machinery industry, said there is an understanding of the motivations behind the Central Bank’s decision. “The Central Bank is doing its job. We are not questioning that. There is an inflationary risk and the fiscal issue cannot be ignored. However, depending on the dose, the medicine could turn into poison.”

The fact that companies’ debt has increased throughout the year weighs heavily on them, as the Selic rate affects the total debt stock. The stock of corporate debt increased from R$610 billion in April to R$743 billion now, according to Paramis, as a direct effect of debenture issuing.

These debt transactions accelerated this year due to a window of smaller net interest rate spread until May, with a firm guarantee from the banks structuring the issues. Paramis’s survey does not consider the effect of reducing the spread on debt.

Additionally, there has been a dearth of initial public offerings (IPOs) for three years, and a reduction in follow-on deals. Owners of leveraged businesses led part of the offerings that came off the drawing board. As a result, there was a reduction in access to funds, which also led to an increase in the issuance of private loans over the past two years.

Debenture offerings reached R$160.6 billion from January to May, a record for the period, with an increase of 204% over 2023.

For Daniel Lombardi, a managing partner at G5 Partners, a firm offering advisory on wealth management, M&A, and private debt restructuring, the Selic at 10.5% for the next few months, could keep private issuances strong until year-end.

There should also be an increase in divestment deals by companies to raise cash, and sale-and-leaseback transactions. That has increased since 2023 among retailers, which are highly affected by increasing interest rates.

Mr. Lombardi points out that companies and banks must be transparent when negotiating a new debt restructuring due to the perspective of a higher cost of capital for longer.

“Leveraged businesses support little hassle, and many companies have received shareholder money at this time of high interest rates. So, the faster it is settled, the better,” he said.

In this environment of greater uncertainty, industrial and retail leaders have raised their tone. CNC and CNI, trade and industry confederations, ABIMAQ (machinery), and IDV (retail) focused on the harmful effects of a contractionary monetary policy—the CNI even cited an “inadequate and excessively conservative” decision.

In a report released this week, Santander sees a negative impact from maintaining the Selic rate unchanged on retailers such as Casas Bahia, Magazine Luiza, and Pague Menos. On the opposite side, the bank sees a possible positive impact on Renner, Vulcabras, Vivara, and Natura, with little or no leverage.

*Por Adriana Mattos — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Health sector faces structural changes amid rising costs

Regulatory, demographic, economic shifts trigger transformations in a market worth over R$300bn

06/21/2024

Fernando Torelly — Foto: Silvia Zamboni/Valor

Fernando Torelly — Foto: Silvia Zamboni/Valor

Since the pandemic, the health sector has undergone significant changes involving regulatory, demographic, and economic-financial issues, leading to structural transformations in a more than R$300 billion market. These changes are directly related to the soaring cost of healthcare, which reached R$239 billion last year considering only medical expenses paid via health plans.

From 2019 to 2023, the accumulated average adjustment of corporate health plans, which represent 70% of the sector, reached 68.72%—more than double the official inflation index for the period. The cost of healthcare is rising faster than the client’s ability to pay, putting the sustainability of this market at risk.

In this context, two noticeable changes are occurring in the sector: the depreciation of health plans, with a reduced offer of services such as reimbursements, services networks, and coverage scope; and a new wave of consolidation, now involving large groups.

With escalating costs and difficulties in passing prices on to consumers, hospital groups and health plan operators, historically on opposite sides, are now merging assets. In this market, when a hospital’s revenue rises, the health plan loses because it has a higher bill to pay. Ultimately, the patient may receive inadequate medical care and face steep price increases.

“Previously, there was a lot of fat in the sector, and costs were passed on to the client, but that’s no longer possible. Operators are now pressuring large hospital groups as well, which didn’t happen before,” said Vinicius Figueiredo, an analyst at Itaú BBA.

Dasa and Amil have merged their hospitals, and Rede D’Or and Bradesco Seguros have created a hospital company. The insurer also has partnerships with Mater Dei and Albert Einstein, BP, and Fleury, and is a shareholder of Grupo Santa in Brasília. Porto Saúde and Unimed Nacional have joined forces with Oncoclínicas to build specialized cancer hospitals. Medical cooperatives are also merging. “Now, we will see operations involving large groups, followed by smaller deals,” said Osías Brito of BR Finance.

“This movement was triggered by Rede D’Or’s acquisition of SulAmérica in 2022. At the time, there were questions about the sector’s future, and Rede D’Or provided an answer by creating a hospital company with Bradesco,” said Fernando Kunzel, co-founder of JGP Financial Advisory, the advisory arm of investment manager JGP. Also in 2022, Hapvida and NotreDame Intermédica announced a merger to create a vertically integrated operator with a national presence and potential to capture the clientele of insurers. This phenomenon has been occurring for about a year.

“Companies’ health plan expenses average 14%, potentially reaching 20%, of payroll. Maintaining an adjustment at the current level could lead to companies canceling the benefit. There is a risk that only those who need and use the health plan the most will remain in the system. However, without risk dilution, the cost will be even higher,” said Luis Fernando Joaquim, a partner at Deloitte.

The increase in healthcare prices is a global phenomenon due to an aging population, the emergence of new treatments and drugs, and long COVID cases. In Brazil, legislative changes have further intensified the rise.

“There was a failure to understand the impacts of COVID on the sector. Immediately after, in 2021 and 2022, regulatory changes allowed the inclusion of mandatory medical procedures by health plans, unlimited therapy sessions for autism spectrum disorder (ASD), and a national minimum wage for nursing. Additionally, several mergers and acquisitions were completed. In short, there were many movements in a short period, and the sector is still in the adjustment phase,” said Flávia Pareto Conrado, partner and founder of Setter Investimentos, a consultancy and adviser.

“The impacts of therapies for ASD patients are being measured now. It’s complicated to price a product with an unlimited number of therapies,” said actuary Luiz Feitoza, a partner at the consultancy Arquitetos da Saúde.

Those who have not closed a partnership agreement are forming commercial alliances. HCor, for example, conditioned the start of new unit construction on pre-approval from health plans to guarantee revenue. “The future lies in large clusters. Today, it’s necessary to form partnerships or strategic acquisitions,” said Fernando Torelly, CEO of HCor, noting that with the crisis, operators are avoiding licensing more hospitals.

Antonio Britto, president of Anahp, a hospital association, believes vertically integrated units, networks, and independent hospitals with strong reputations can coexist. Mr. Britto said that despite the improvement in operators’ results in the last quarter of 2023 and the first three months of 2024, pressure on hospitals remains.

Abramge, the health plan association, said that the recovery is partial and that more than a third of operators still report negative results.

*Por Beth Koike — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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After government measures, steel companies revise projections

Estimates for steel imports shift to a 7% decrease from a 20% increase

06/20/2024

Jefferson De Paula — Foto: Nilani Goettems/Valor

Jefferson De Paula — Foto: Nilani Goettems/Valor

The federal government’s decision to establish quotas for the import of 11 types of steel products, with a 25% tariff on surplus volume, is expected to bring moderate improvements to the Brazilian steel industry in the second half of the year, according to the Brazil Steel Institute (Aço Brasil).

Although imports had risen through May, driven by a global oversupply and unfair competition practices by some producing countries, the trade association expects that the measures implemented this month will reduce imports by 1.5 million tonnes this year.

“It’s not the best [agreement], nor the one we initially wanted. But we believe it’s an agreement that, if it works, will significantly improve the situation of the steel industry in Brazil,” said Jefferson De Paula, chairman of Aço Brasil and CEO of ArcelorMittal Brasil.

From January to May, steel product imports rose by 26.4% to 2.3 million tonnes, while domestic production saw a slight increase of 0.6%, reaching 13.6 million tonnes. Last year, total imports reached 5 million tonnes, mostly from China, 50% higher than in 2022, while domestic production shrank by 6%.

Marco Polo de Mello Lopes, managing director of Aço Brasil, noted that the 30% increase in the average imports of steel products between 2020 and 2022 used to define the quotas was not exactly what the Brazilian industry had sought. “The quota is generous, beyond what we thought was necessary to regulate the market, because of this 30% delta,” he said.

Industry representatives will meet with the government next week to discuss the results of the measure so far and any necessary adjustments. The industry has already detected, for example, an increase in rebar imports, which are not included in the initial list of products subject to quotas.

Nevertheless, there will be gains, and steel companies have revised their forecasts for 2024 upward. They now project a 0.7% increase in steel production, reaching 32.2 million tonnes, compared to the previous estimate of a 3% decline. For imports, the projection, which at the end of 2023 was for a 20% increase, has shifted to a 7% decrease, totaling 4.7 million tonnes. Domestic sales are expected to grow by 2.5% to 20 million tonnes, against an initial forecast of a 6% decline.

According to Mr. De Paula, steel consumption did not see significant growth in the first months of the year but could end 2024 with an accumulated increase of 1% to 3%. This outlook considers the strong performance of the construction sector, with more projects in the My Home My Life housing program and a resurgence of real estate launches, as well as a more active automotive market for both light and heavy vehicles.

With the impact of the measures on the domestic market, the sector is expected to gradually reduce idle capacity and maintain the planned R$100 billion investment package for the next five years. Asked about steel price increases in the domestic market, which have already started to be announced, the association’s leadership pointed to market economics.

“It wasn’t said that there would be no price increases. One thing was the claim by consumer sectors that the industry wanted to raise prices. Price speculation is not on the radar, but in a market economy, companies will have to make adjustments,” said Mr. Lopes.

As proof that Brazilian mills follow the international market, Aço Brasil noted a 12.7% drop in domestic hot coil prices from January 2023 to mid-June this year, in line with prices in other countries.

“In these 10 months [of talks with the government], there was a lot of discussion about price. But the price is set by the market, and it was agreed that our prices would be market-based,” said Mr. De Paula.

Faced with the surge in imports since the end of 2022, the industry had sought some form of trade defense from the government. In February this year, Aço Brasil requested the adoption of a quota-tariff system for 18 types—Mercosur Common Nomenclature (MCN)—of steel products and succeeded for nine of them. Two MCNs for tubes were also approved.

Now, said Mr. Lopes, the industry and the government are monitoring 27 other MCNs to prevent imports of similar products, not on the quota list, from circumventing the rules.

*Por Stella Fontes — Araxá

Source: Valor International

https://valorinternational.globo.com/
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CBMM advances in niobium batteries, equips new Volkswagen bus

Key advantage of niobium oxide use is ultra-fast charging

06/20/2024

Collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries — Foto: Divulgação

Collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries — Foto: Divulgação

One of the major challenges in the electrification of urban mobility is reducing vehicle recharge times. In many cases, batteries require hours to recharge, and for buses and trucks, this means long downtime periods, increasing costs, and larger fleets.

This challenge brought CBMM, a niobium products manufacturer controlled by the Moreira Salles family, together with Volkswagen Caminhões e Ônibus. The collaboration has resulted in the e-Bus, a new electric bus equipped with niobium-lithium batteries. The prototype was unveiled on Wednesday at CBMM’s industrial and mining complex in Araxá, Minas Gerais.

While the bus has no set date for mass production, the battery, developed by CBMM in collaboration with Japan’s Toshiba Corporation and Sojitz Corporation, is expected to hit the market in larger volumes by the second half of 2025.

The primary advantage of using niobium oxide in batteries is ultra-fast charging—up to 10 minutes for light vehicles and up to 15 minutes for heavy vehicles, without the risk of overheating or explosion. During the prototype’s presentation, a real-time demonstration showed the e-Bus being recharged in 8 minutes and 37 seconds.

Rapid charging with niobium technology does not compromise battery life. “The evolution of these materials ensures competitiveness and quality for the batteries,” said CBMM CEO Ricardo Lima.

Since 2014, CBMM has been developing materials to enhance battery performance. In mid-2018, the company signed a research contract with Toshiba, which led to the technology used in Volkswagen’s electric bus.

The companies aim to use these buses for urban routes, given their estimated 60-kilometer range, which covers over 90% of routes in large Brazilian cities. The e-Bus prototype, built on an 18-tonne chassis, has four battery packs, each with a usable capacity of up to 30 kWh (kilowatt-hours). The bus charges via the front roof, connecting wirelessly to a 300-kW pantograph fixed to the ground and connected to the electrical grid.

According to Volkswagen Caminhões e Ônibus CEO Roberto Cortes, it typically takes about four years for a new electric vehicle to reach the market. He noted that the development of the E-Delivery electric truck began in 2017 and it was launched in 2021.

To date, CBMM has invested around R$450 million in niobium oxide production capacity, in addition to the R$80 million the battery program receives annually. Currently, the company has 41 battery projects under development, including applications for heavy vehicles, mining transport, and robots.

CBMM expects the battery sector to account for 25% to 30% of its revenue by 2030. Currently, approximately 80% of its revenue comes from steel products, as niobium addition enhances steel strength. The company does not plan to produce the niobium-lithium batteries themselves. Instead, the Minas Gerais government is in discussions with Toshiba, which currently manufactures the cells in Japan, to attract potential investment to Brazil.

The CBMM-Toshiba partnership has included pilot cell manufacturing plants in Japan and active material production in Araxá, along with a dedicated battery materials laboratory at the Minas Gerais factory.

Following the installation of the pilot niobium oxide plant, CBMM has built a factory with a capacity of 3,000 tonnes per year, which will begin operations in August. This volume is expected to meet demand for the first three years.

The reporter’s travel costs were covered by CBMM.

¨Por Stella Fontes — Araxá

Source: Valor International

https://valorinternational.globo.com/
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Embraer strategizes for U.S. market growth

Company sees expansion potential in commercial, business, and military aircraft

06/20/2024

Brazilian plane maker is exploring mergers or acquisitions to gain a foothold in the defense sector with the military C-390 aircraft — Foto: Divulgação

Brazilian plane maker is exploring mergers or acquisitions to gain a foothold in the defense sector with the military C-390 aircraft — Foto: Divulgação

Embraer is ramping up efforts to expand its presence in the United States. The plane maker’s strategies include increasing sales of commercial jets like the E-175 and business jets like the Praetor 500 and exploring mergers or acquisitions (M&A) to gain a foothold in the defense sector with the military C-390 aircraft. These plans were outlined during Embraer Day in São José dos Campos on Tuesday (18) and Wednesday (19).

The United States leads the aviation sector, with the largest airlines and business jet operators globally. North America accounted for 62% of Embraer’s revenue in the first quarter of this year.

Rodrigo Silva e Souza, the chief marketing officer of Embraer’s commercial division, noted that by 2030, an average of 40 aircraft in the sub-76-seat category will be retired annually in the U.S.

“Significant replacement demand is expected to favor Embraer, given U.S. market regulations,” Mr. Souza said. A union agreement limits the weight of regional jets to 39 tonnes, which is why the heavier E2 model does not compete in the U.S. regional market, unlike the E-175.

“While this demand is primarily for replacement, we also see interest in fleet expansion, as evidenced by American Airlines,” he added. According to Mr. Souza, American Airlines’s order has spurred interest from other groups in the country.

In addition to replacing older E1s, a model launched in 2004, the company aims to capture the market for renewing Bombardier’s CRJ 700 and 900 fleets.

Another focus area is the business jet division. Alvadi Serpa Junior, director of market and product intelligence for executive aviation, highlighted that the company aims to capture market share from Cessna’s Citation Latitude with increased sales of the Praetor 500.

Currently, the Praetor 500 holds 33% of the mid-size business jet market, with the Latitude holding the remainder. Mr. Serpa Junior attributed this to deliveries to NetJets, the world’s largest fractional jet ownership company.

NetJets has started converting part of its purchase options for Embraer jets into firm orders—so far, five orders have been confirmed. NetJets has options for 250 Praetor 500 jets, worth approximately $5 billion. These options are not included in Embraer’s disclosed executive aviation order book, valued at about $4.6 billion. “Delivering our models to NetJets naturally balances the market,” Mr. Serpa Junior told Valor.

North America and the Caribbean are Embraer’s primary markets for executive aviation, with 57% of the manufacturer’s jets (1,015 units) in operation. Latin America accounts for 17%.

In the defense division, Embraer is considering M&A strategies in the U.S. to introduce the C-390 military aircraft. U.S. defense operations must be conducted by local companies, necessitating a partnership with Embraer. The company already collaborates with Sierra Nevada Corporation to produce the Super Tucano.

“We have a Super Tucano production line in Jacksonville. We are expanding the team and are open to partnerships with the U.S. government and acquisition opportunities,” said João Bosco Costa Jr., CEO of Embraer’s defense and security division.

To date, Embraer has delivered seven C-390 units (six to the Brazilian Air Force and one to Portugal). The order book includes 13 more units for the Brazilian Air Force, two for Hungary, four remaining deliveries to Portugal, and orders from South Korea—though the total for South Korea has not been disclosed.

The reporter’s travel costs were covered by Embraer.

*Por Cristian Favaro — São José dos Campos

Source: Valor International

https://valorinternational.globo.com/
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Central Bank holds interest rate at 10.5% despite Lula’s critique

Monetary Policy Committee remains non-committal on future rate decisions

06/20/2024

Roberto Campos Neto — Foto: Fabio Rodrigues-Pozzebom/Agência Brasil

Roberto Campos Neto — Foto: Fabio Rodrigues-Pozzebom/Agência Brasil

In a unanimous decision, following criticism from President Lula, the Monetary Policy Committee (COPOM) paused its recent series of interest rate cuts and maintained the Selic rate (Brazil’s benchmark interest rate) at 10.5% per annum. This decision, halting the reduction sequence that began in August 2023 when the rate was 13.75%, was influenced by deteriorating inflation forecasts and diminishing market expectations.

The decision emerged a day after President Lula leveled fresh criticism at Central Bank President Roberto Campos Neto, accusing him of being “politically biased” and asserting that Mr. Campos Neto’s conduct was the only “thing out of place” in the country.

In their statement, the board highlighted that the current global uncertainties, combined with a domestic environment “characterized by persistent economic activities, escalating inflation projections, and unanchored expectations,” necessitated a more cautious approach.

The committee refrained from making specific commitments regarding the future trajectory of the Selic rate, emphasizing its vigilant stance and asserting that “any future adjustments” will be guided by “a firm commitment to converging inflation to the target.” It also highlighted that monetary policy should remain contractionary “for a sufficient period at a level that consolidates both the disinflation process and the anchoring of expectations around their targets.”

Recent data from the Focus report indicates a worrying trend in inflation expectations; for 2024, the projection has risen to 3.96% after six consecutive increases, and for 2025, it stands at 3.80% following seven weeks of continuous rises. Since the last COPOM meeting, Mr. Campos Neto and Gabriel Galípolo, the director of monetary policy, have both voiced their concerns over the escalating inflation expectations in public addresses.

In light of these developments, the COPOM emphasized the need for “serenity and moderation in the conduct of monetary policy.” The current economic climate is described as one where disinflation is “expected to be slower,” there is a “widening of the unanchoring of inflation expectations,” and the global scenario remains “challenging.”

The decision to maintain the Selic rate aligned with market expectations. A survey conducted by Valor, which included 132 financial institutions, revealed that only nine believed there was room for a 25-basis-point reduction, while the majority anticipated that the rate would remain unchanged.

Market observers also paid close attention to the voting dynamics within the committee following a split decision in May. At that time, Mr. Campos Neto, Carolina de Assis Barros, Diogo Guillen, Otávio Damaso, and Renato Gomes voted in favor of reducing the rate by 25 basis points. Conversely, directors appointed by the current administration, Ailton Santos, Gabriel Galípolo, Paulo Picchetti, and Rodrigo Teixeira, voted for a more substantial cut of 50 basis points.

Another point of interest was the ongoing debate on the balance of risks for inflation, which maintained factors pulling in both directions. In the minutes from the May meeting, it was noted that some members of the committee saw “merit” in discussing an asymmetrical balance of risks skewed upwards, suggesting that upward pressures on inflation were deemed more significant than downward influences.

In Wednesday’s announcement, the balance of risks was again described as symmetrical, with ongoing global inflationary pressures and persistent inflation in the services sector due to a tighter output gap—indicative of less economic idleness—highlighted as upward pressures. Conversely, the COPOM noted potential downward risks, including a pronounced slowdown in global economic activity and a more significant impact from synchronized monetary tightening on global inflation.

The COPOM outlined two scenarios for its inflation forecasts. Under the reference scenario, which assumes the Focus interest rate trajectory and an exchange rate starting at $5.30 per dollar based on purchasing power parity, inflation is projected at 4% for 2024 and 3.4% for 2025. This is a slight increase from May’s projections of 3.8% for this year and 3.3% for next year. For monitored prices, the projection was adjusted from 4.8% down to 4.4% in 2024, while the estimate for 2025 remains steady at 4%.

In the alternative scenario, where the Selic rate remains unchanged throughout the relevant period extending into 2025, the projections are 4% for 2024 and 3.1% for 2025, against a target of 3% for both years.

*Por Gabriel Shinohara, Alex Ribeiro — Brasília and São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Cimed in final talks to acquire Jequiti

Acquisition of Grupo Silvio Santos’s brand to open new business vertical for Marques family’s pharmaceutical company

06/19/2024

Cimed has accelerated acquisitions towards the goal of reaching R$5 billion in sales — Foto: Divulgação

Cimed has accelerated acquisitions towards the goal of reaching R$5 billion in sales — Foto: Divulgação

The final touches are being put on the deal between Grupo Silvio Santos and Cimed for the sale of Jequiti to the pharmaceutical company owned by João Adibe Marques. Initially discussed as a majority stake purchase, the negotiations have evolved in recent weeks toward a complete acquisition. The remaining adjustments now revolve around the price.

“There was already a consensus on the price for the majority stake, and Cimed has detailed plans for the operation. When discussions moved to shareholder agreement details, it became clear to both parties that a complete acquisition was more appropriate,” said a source.

Jequiti is being valued at around R$450 million, equivalent to its revenue, according to Pipeline, Valor’s business website. While Cimed is seeking a discount and Grupo Silvio Santos is aiming for a premium, the final check is expected to be in this range, sources say. The agreement also includes facilitated brand exposure during prime time on TV channel SBT, similar to the current arrangement. The brand has been boosted on TV over the past decade by the show “Roda a Roda Jequiti,” attracting customers and consultants seeking prizes.

Mr. Marques has also reached an agreement with Governor Romeu Zema of Minas Gerais to establish a factory and distribution center for cosmetics in the southern part of the state, benefiting from tax incentives, Pipeline found.

Jequiti, which had years of financial losses, has now returned to profitability. The new owner will integrate a national distribution network, bringing products from one of the main medium-class brands to small neighborhood pharmacies in rural towns.

On the other hand, Jequiti brings Cimed a robust outsourced sales force: the brand’s consultants, a door-to-door strategy Mr. Marques had on his radar for vitamins, baby products, and hygiene and beauty items. Jequiti boasts a team of over 200,000 consultants, and Mr. Marques plans to launch this direct sales initiative in the second half of this year, using pharmacy stock in what he describes as “the salesperson outside the store.”

“This is transformational for Cimed. The company was already growing with consumer products in addition to generics, but Jequiti opens an entire new vertical,” said an executive familiar with the matter.

Experience with Carmed lip balms has shown that Mr. Marques knows how to sell consumer items: Carmed generated R$400 million in revenue in the second half of last year through collaborations and limited editions. The goal is to reach an annual revenue of R$1 billion from this product alone.

For the Jequiti transaction, Cimed is receiving legal advice from Machado Meyer, without a financial advisor. Grupo Silvio Santos is being advised by Bradesco BBI and Lefosse Advogados.

Cimed benefits from low leverage, with room for M&A, and low financing costs in the capital market. The leverage ratio is below 0.8 times, and the group recently completed its third debenture issuance. Distributed by XP Investimentos, it raised R$600 million with a DI rate plus 0.75% per year (less than half the spread of the previous issuance) and a five-year term.

Cimed, which grossed R$3 billion last year, aims to reach R$5 billion by 2025, bringing it closer to a potential IPO. The company has been courted by banks.

Both Cimed and Jequiti did not respond to requests for comments.

The original story in Portuguese was first published on Valor’s business news website, Pipeline.

*Por Maria Luíza Filgueiras — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Sabesp privatization draws interest from Tanure, Aegea, and Equatorial

Tanure’s bid for 15% of the company takes market by surprise

06/19/2024

Sabesp’s privatization offering is scheduled for August, following the “roadshow” period, which involves formal discussions with investors — Foto: Victor Moriyama/Bloomberg

Sabesp’s privatization offering is scheduled for August, following the “roadshow” period, which involves formal discussions with investors — Foto: Victor Moriyama/Bloomberg

Businessman Nelson Tanure has shown interest in joining the race for Sabesp’s privatization, according to information obtained by Valor. Should he decide to proceed, Mr. Tanure would vie for the role of the primary shareholder in the sanitation company alongside Aegea and Equatorial, the two other entities currently interested in the asset. The deadline to express interest in this process concluded on Monday (17).

Sources close to the matter indicate that Mr. Tanure is exploring synergies with the Metropolitan Water and Energy Company (EMAE), which he acquired earlier this year in the first privatization auction under the Tarcísio de Freitas administration. However, the sources noted that the “unusual conditions of the auction” and “strong political opposition” have posed challenges. Mr. Tanure has declined to comment on the matter.

Given the substantial financing required and the hefty sum the winner must disburse, there is behind-the-scenes speculation about the possibility of forming a consortium with BNDESPar, the Brazilian Development Bank’s (BNDES) equity arm. However, the bank has stated that it “has not entered into and is not in the process of negotiating any agreement, covenant, or partnership with third parties for participation in the public offering of Sabesp.”

In the market, expectations suggest that Mr. Tanure’s potential bid might not generate significant interest during the “bookbuilding” process, where investors’ intentions are gauged.

This situation could diminish his chances of success, as one of the criteria for selecting the primary shareholder is the demand generated during the bookbuilding. Conversely, it also raises questions: if Mr. Tanure submits the highest bid but fails to secure the deal due to low volume in the book building, this could lead to further scrutiny, according to sources.

On Tuesday (18), news of the businessman’s interest in Sabesp emerged, catching the market off guard and resulting in a 2.97% decline in Sabesp shares, which closed at R$72.11. Similarly, when Mr. Tanure’s group secured the EMAE auction, the company’s preferred shares plummeted by 28.42%.

Beyond EMAE, Mr. Tanure holds significant stakes in the power distribution company Light and oil companies Prio and Azevedo & Travassos, among others.

The São Paulo government has crafted a privatization proposal with an innovative model that incorporates a mechanism designed to deter “adventurers” from seeking to become a primary shareholder.

The offering is structured in two phases: Initially, the two potential primary shareholders proposing the highest prices for a 15% stake in the company will be selected. Subsequently, for each candidate, two bookbuildings will be organized to accommodate other investors interested in becoming minority shareholders in Sabesp.

The primary shareholder who assembles the most advantageous bookbuilding will prevail based on criteria that meld the highest weighted price with the largest volume of demand. This means that a partner may fail to secure the position, even if they offer the highest price.

When the privatization rules were unveiled, market participants highlighted the potential for regulatory scrutiny and litigation, particularly concerning the non-priority of price as the sole decisive factor. Nonetheless, the government has stood by this approach, asserting that it enhances value for the state.

Upon inquiry, the São Paulo government mentioned that the “public offering is in a quiet period,” during which “all communications will be conducted through the prospectus and notices of material fact.”

Following the expression of interest, the contenders for the primary shareholder position are required to formalize their bids. Besides Mr. Tanure, Aegea is attempting to establish a consortium with its shareholders (Equipav, GIC, and Itaúsa) and partners from other ventures (Perfin and Kinea). Equatorial is also a contender, forming a consortium with partners including Squadra funds, Opportunity, and Canada Pension Plan.

Aegea and Sabesp declined to comment. Equatorial did not respond to inquiries.

Some potential bidders are still in discussions with the São Paulo government, seeking adjustments to the terms of the privatization. A major point of contention is the “poison pill” clause, designed to protect minority shareholders against hostile takeover attempts. This provision has been unpopular among some groups, who are advocating for its removal, sources told Valor.

Under the proposed terms, the primary shareholder would hold a 15% stake in Sabesp and one-third of the board of directors seats. A cap has been set on shareholder voting rights at 30%, which is also the threshold for initiating a public offering of shares.

“Even though the primary shareholder is acquiring only 15% of the company, it is treated as if they had reached the 30% threshold right from the start due to the shareholder agreement. With large funds behind the primary shareholder, it’s impossible to monitor everything happening within these funds constantly. These are offshore funds managed by dozens of managers simultaneously,” explained a source.

This rule impacts financial groups that might join the consortium of the primary shareholder while also managing various other stock funds that do not hold a stake in Sabesp’s controlling group. The “poison pill” clause is seen as a potential hurdle for these funds to invest in Sabesp. Any decision by a fund manager, anywhere in the world, to purchase even a single Sabesp share could activate the control mechanism due to the governance structure of the funds not covering such granularity.

Sabesp’s privatization offering is scheduled for August, following the “roadshow” period, which involves formal discussions with investors. This timing is intended to avoid interference from the election season on the operation.

*Por Fernanda Guimarães, Taís Hirata, Fábio Couto, Robson Rodrigues — São Paulo and Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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