After deals were unveiled, target companies surged 21% on average
10/20/2022
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In the last five months, 10 deals caused shares of target companies to rise 21% on average — Foto: Aloisio Mauricio/Agência O Globo
At a moment when the international outlook and Brazil’s economic growth numbers limit the recovery of the stock market, strategic investors take advantage of the discounted prices to acquire stakes in Brazilian companies. This move suggests that the stock market is cheap in comparison with its peers and past performance, asset managers and analysts say.
Strategic investors are those who buy stakes in companies with an eye on growth potential. This is the case for private-equity funds or companies with a significant presence in the sector in which they operate. In general, these are players with the financial strength to hold positions for a longer period.
In the last five months, 10 deals analyzed by Valor, which include purchases of control, mergers, and acquisitions of minority stakes, caused the shares of the target companies to increase by 21% on average. The market capitalization of the sample grew by about R$25 billion until Wednesday, considering as initial date when the deal was announced.
The abundance of share buybacks by strategic investors, as well as the increase in share buybacks by companies, is a phenomenon observed in down-market times, said João Luis Braga, founding partner of Encore Asset Management. “It’s a huge signal that the stock market is extremely cheap.”
Investors with a longer-term profile such as private-equity funds, who can cope with the macroeconomic risks typical of devalued stock markets, make the most of these situations. “Strategic investors flush with cash take advantage of this and provide an exit for short-term investors,” said Mr. Braga.
Last week, U.S.-based fund Apollo Global made a new proposal for Braskem, valuing the petrochemical company at R$37 billion. The stock has risen 25% since the announcement. The purchase of a stake in Vale by Cosan was another recent big-ticket deal on the stock exchange. The group, which has operations in agribusiness, energy, and logistics, is willing to pay about R$22 billion to take a 6.5% stake in the mining company, one of the world’s largest producers of iron ore.
The higher number of deals driven by strategic investors can be seen as a phenomenon opposite to the waves of IPOs, said Leonardo Rufino, a partner and equity manager at Mantaro Capital.
While strong, red-hot markets pave the way for new listings, those periods when stock prices are seen as being below their “fair price” attract the strategists, who typically seek minority stakes in good businesses at good prices, with an eye on long-term gain.
There were no IPOs in Brazil this year, compared to 74 operations in 2020 and 2021, at a time when the stock market was driven by low interest rates. As is common in phases of euphoria in the stock market, many stocks ended up debuting with overestimated prices, which intensifies setbacks in periods of decline.
There is a cycle exactly like that unfolding right now: after the wave of IPOs in 2020 and 2021, the market correction brings down even more stocks that were launched above the appropriate price, or those that were already in the portfolios and were traded at overvalued prices.
According to a survey carried out by Valor Data, of the 74 shares of companies that went public at B3 between 2020 and 2021, 49 underperformed the Ibovespa, Brazil’s benchmark stock index. This is the case of Hidrovias do Brasil, which is down 67% since its debut, on September 24, 2020, while Ibovespa has climbed 19%. CSN Mineração fell 55% since its IPO, in February 2021, while Ibovespa is down only -3.9% in the period. And Mater Dei has lost 50% since April 2021, while Ibovespa fell 3.7%.
In this group of new companies, there is potential for new investments by strategic investors. “Companies that went public in the last two years have plummeted, but many other stocks have also dropped fast. So, this is a fertile field for acquisitions, but it will be case by case,” said Mr. Rufino.
Among the more consolidated, high-quality companies, there are also many cases where the potential payback is higher than in the past, although many of those companies are even better now. The point is that for any of those groups the current scenario is very complex and therefore there are also reasons for the discount to be higher, especially in the short term. This gives an advantage to strategic investors, who have the stomach to wait for the asset to appreciate – more than a stock fund, for example.
Ibovespa is currently traded at a multiple of 6.9 times, considering the price-to-earnings ratio, 17% cheaper than a year ago, when this multiple was 8.3 times, said Gustavo Campanhã, manager at WHG. The S&P 500 index is currently traded at 15.3 times, 26% below the multiple of a year ago. The worse performance of the U.S. stock exchange has to do with the fact that practically one-third of the index composition is of technology companies, including behemoths like Amazon and Google, which are much more sensitive to the rise in interest rates.
In Brazil, about 60% of the index is composed of banks, commodities, and energy — with Vale and Petrobras alone accounting for 25%. The appreciation of commodities, in addition to the fact that the country is already well ahead of the rest of the world in the cycle of interest rate hikes, explains the advantage of the local stock exchange compared with the U.S. one.
But when comparing the two indexes — excluding the commodities and banking sectors, which are the set of stocks that more directly reflects the performance of the domestic economy — the price-to-earnings ratio is at 14.5 times, close to the level of 15 times observed on the eve of the 2018 election, said Mr. Campanhã.
At the beginning of 2019, a year in which expectations for the Brazilian economy were very optimistic given the promise of adopting a more pro-market economic plan, this multiple reached 19 times.
For Mr. Campanhã, given the current context and the difficulties for economic growth, it is possible to say that those stocks are trading at an adequate price level. A positive change in this dynamic depends on economic growth and the reduction of country risk.
“No foreign investor will come to the country until there is a clearer political backdrop unless the asset is extremely cheap,” he said. “So, you can’t say that there will be a systematic entry of this investor.”
The prices and market conditions of some sectors suggest that more buyout moves are coming, said Sergio Goldman, manager and head of research at Esh Capital. He cites the e-commerce segment, which would not have room for so many competitors, and digital banking, whose accelerated growth in recent years may trigger a consolidation drive. The construction sector is also attractive in cases where companies are complementary, depending on the customer profile and geographic location.
Anyway, even with the discounts seen in the stock market, Mr. Goldman considers that it is not possible to say that the market is cheap just by looking at the companies’ past valuation. This is because the level of visibility on the economic growth and, consequently, of the companies today is very low. And this is a fundamental variable to define whether a company is cheap or not. “In light of this, some companies may be at the right price, even though they are well below their historical level,” he said.
*By Lucinda Pinto, Nelson Niero — São Paulo
Source: Valor International