To avoid dilution in capital increases, shareholders have raised funds in the market

11/08/2022

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Controlling and primary shareholders of companies are being financed by banks through follow-on offerings to avoid great dilution of their stakes. “There is a perception on the part of these shareholders that shares are cheap on the stock market. They want to grow, especially through acquisitions, but they need to raise funds. On the other hand, they are sensitive in relation to dilution at current price levels,” said Gustavo Miranda, head of investment banking at Santander.

In the last few months, investment banks have started to set up operations for companies that raise funds in the market via follow-on offerings or capital increase, but do not have enough cash to move forward.

In September, Iguatemi, owned by the Jereissati family, raised R$720 million on the stock exchange to buy the remaining 36% stake in the shopping mall JK Iguatemi for R$667 million. Sources say that the controlling shareholders got a financing deal to move forward with the offering so that they would not be diluted. The controlling shareholders of Vamos, a rental business focused on heavy-duty vehicles, also agreed on the terms to get a financing deal, but then they did not need to use it to raise R$640 million in September, sources in the financial market say.

The controlling shareholders of Fras-le, Randon’s auto parts business, increased their stake through an offering launched in April. The company raised R$629 million in the follow-on offering, less than expected, and had to rely on disbursements of its primary shareholders to raise funds in the market.

Ricardo Tardelli Catelli, Bradesco BBI’s head of structured finance, said that the bank has seen a greater participation of major shareholders in companies’ offerings. “Some stocks are at discounted prices. The bank discusses the best funding opportunity strategy for the client.”

Besides typical financing, Santander has offered tools, such as derivatives, for companies to finance themselves, said Mariana Lima, the bank’s head of stock derivatives.

Pedro Juliano — Foto: Divulgação

J.P. Morgan has also been offering options linked to the capital market, said Pedro Juliano, the New York-based bank’s head of investment bank in Brazil. According to him, derivatives have been a solution for this type of structure. “They have two major purposes: protection or leverage. In this case, it is leverage. You can offer a cheaper financing and the stock can be used as guarantee,” he said.

The financial market has given the benefit of the doubt to those making acquisitions, said Mr. Juliano. “The stocks of those closing M&A deals are expected to go up. Clients who want to do strategic M&A deals, want to finance deals, and doesn’t want to be diluted look for these options. This is very common in Europe and the United States, and it’s starting in Brazil.”

So far, companies have raised R$51.9 billion, including the largest one, Eletrobras, according to data from the Brazilian Financial and Capital Markets Association (Anbima). Seventeen follow-on offerings have been launched, but not a single IPO so far.

At the end of October, Casino, the French company that owns food retailer Pão de Açúcar, told the market that it intends to sell part of its stake in the cash-and-carry chain Assaí for about $500 million. In a notice to the market, the company said it intends to raise funds through a follow-on offering.

New follow-on offerings are expected to be launched later this year, as the presidential race is now defined, said Vitor Saraiva, head of equity capital markets at XP. The executive foresees IPOs early next year, especially in the infrastructure and energy fields.

In 2021, companies raised R$128 billion through 72 follow-on offerings and IPOs, according to data from Anbima.

With the victory of Luiz Inácio Lula da Silva, the investment banks are waiting for who will make up the president-elect’s economic team to make their projections for the resumption of the capital market.

Vice-President-elect Geraldo Alckmin, a former governor of São Paulo who is well-regarded by the financial market, has been chosen for the transition team, but the investment banks are still very concerned about the next administration’s economic team.

If Mr. Lula da Silva picks a politician as economy minister, as has been rumored, the resumption of capital market offerings at the beginning of 2023 may be more modest. “If a minister from the Workers’ Party’s inner circle is chosen, we don’t believe there will be an euphoria,” said a source from an investment bank.

Grupo Iguatemi’s controlling shareholders declined to comment. As for Fras-le’s offering carried out in April, Randon said in a note that the capital markets are more complex due to the global macroeconomic context, and the company saw the opportunity to expand its participation by increasing the capital of its subsidiary. “The offering met two objectives: raise funds for the company’s non-organic growth projects and improve liquidity by bringing new investment funds and institutional investors to the shareholder base.”

Simpar, parent company of Vamos, said that the offering was small in relation to the company’s market capitalization. Therefore, the dilution was not so high.

*By Mônica Scaramuzzo — São Paulo

Source: Valor International

https://valorinternational.globo.com/