Companies bet on M&A after failed IPOs

Some companies that canceled IPOs this year are now betting on M&A. After failing to raise funds in the stock market to prop up their expansion efforts, they decided to search for private partners. In addition, firms partially owned by private-equity funds are seeking a way out for these partners.

In the year to July 21, companies raised R$100 billion through 54 IPOs and secondary offerings, a survey by Santander shows. Thirty-five companies went public during the period. Market players expect the amount to reach R$150 billion this year. Despite the heated market, 40 companies gave up their offerings, data by the Securities and Exchange Commission of Brazil (CVM) show.

The failed IPOs are driving the M&A activity. In the year to July 21, 286 deals totaled $54.8 billion, compared with 253 deals totaling $11 billion in the same period last year, according to consultancy Dealogic.

Tok & Stok, the furniture and decoration chain that has Carlyle (now SPX Capital) as a partner with a 60% stake, is seeking a private investor, three people familiar with the matter say. The company postponed plans to go public earlier this year as market conditions were not “ideal.” Carlyle, which acquired control of the company for $700 million in 2012, has been looking for some time for an exit door for this investment, sources say.

One of Brazil’s leading decoration companies, Tok & Stok had plans to launch an IPO in 2019, but it did not materialize. Late last year, it filed with the CVM after rivals Madeira Madeira, Mobly and Westwing did so.

However, unlike its competitors, the company founded in 1978 was not prepared for digital sales, sources say. The company, which revamped the management team last year, has been investing in the digital channel and talking to potential investors, a source says. Carlyle does not rule out tapping the capital markets in the future. The fund also invests in the restaurant chain Madero, which is preparing to go public, and toy retailer Ri Happy.

Westwing, a rival of Tok&Stok, raised R$1.1 billion on the stock exchange in February, but fell since then. The stock closed on Friday at R$9.03, down 30.5% since its debut on February 10. The company “is in talks with competitors” to mull alternatives, and sources say Renner and Riachuelo were sounded out, but the talks did not move forward.

LG Informática, which develops technology for HR management, also decided to halt its IPO in April. The company, which intended to raise R$900 million, then hired Rotschild to find a buyer, a source says. In July, the company announced the acquisition of Norber, which will strengthen the company’s technology ecosystem to make it more attractive for a potential buyer.

The search for a private investor is also in the plans of office supplies chain Kalunga, which has given up on going public this year, sources say. The company, which invoiced R$1.8 billion last year, is looking for investors to grow and reduce debt, which totaled R$738 million at the end of 2020. The controlling shareholders do not rule out resuming the plans to go public when market conditions improve.

Eduardo Miras, head of investment banking at Citi, does not see IPOs as “a beginning, nor as an end” of the cycle for a company. Those giving up the IPO can seek private capital and resume plans to go public later. Stock prices often reflect the short-term scenario, he said. “IPO shows you the price, not the value.”

It is a natural path for companies to raise funds in the capital markets, says Diogo Aragão, head of mergers and acquisitions in Brazil at Bank of America (BofA). The transition to M&A after a failed IPO, however, may have a different dynamic, once the asset value has already been tested by the market, he said.

In some cases, private companies may merge with listed ones, a process known as “reverse takeover.”

Mergers and acquisitions are expected to remain firm by the end of the year. “We saw many consumer, retail and health companies launching IPOs, creating a reference value in the market,” Mr. Aragão said.

Gustavo Miranda, head of investment banking at Santander, says failed IPOs make M&As easier because these companies have already gone through due diligence.

This is the case with Cosan’s gas company Compass, which raised R$810 million in a round led by the asset manager Atmos months after giving up launching an IPO. The deal was well received by the market, since Cosan’s company is seen as the front-runner to take over Petrobras’s Gaspetro.

Sought for comment, LG Informatica said “it is analyzing several alternatives for growth.” Tok & Stok said in a note it is committed to improving its logistics structure and offering the best experience for the consumer. “Tok&Stok is moving forward with its expansion and development plans in 2021, regardless the IPO it had been conducting … Our goal is to become a public company in the medium term, as soon as we reach a scenario with greater synergy with our company profile,” CEO Octávio Pereira Lopes said.

Kalunga said it decided to cancel the offering but is still registered as a public company. During this period, the company is adjusting governance and “working to tap the capital markets publicly or privately” while carefully monitoring “funding opportunities in line with its growth plan and business strategy.” Carlyle, Westwing and Renner replied that they would not comment on market rumors.

Source: Valor international

https://valorinternational.globo.com/