Deal of the Year Latin America 2009
VISANET Amount: $4.3 billion IPO
VISANET Amount: $4.3 billion IPO Global coordinators: Banco Bradesco BBI, Banco do Brasil, Banco Santander and JP Morgan Chase Joint bookrunners: UBS Pactual and Goldman Sachs Turbulent market conditions forced Brazilian credit card processor VisaNet to hold back its plans for an initial public offering in September, but when a friendlier environment allowed it to try again the IPO was a roaring success.
Demand for VisaNet’s shares was 10 times larger than the offer size and more than 400 institutional equity investors took part in the offer. Most remarkable was the strong interest from retail shareholders in Brazil.
“The offer saw strong retail demand with thousands of local investors putting in orders when we brought the stock to market,” says Denise Pavarina, head of investment banking at Banco Bradesco BBI in Sao Paulo. “Most of the people that have any connection to capital markets bought shares in the deal.”
Nevertheless, the largest demand came from institutional accounts outside the country – namely the US – as is typical for most of the country’s equity deals.
VisaNet persuaded foreign investors to pay attention to the Brazilian stock market again after a drop in the Bovespa index over the course of 2008 caused many to pull out.
“VisaNet reopened the IPO market in Brazil and brought in a large number of international investors,” says Pavarina. “At the same time the offer brought a lot of investors back into the Brazilian market that had previously pulled out of the country.”
Retail and institutional have not been left unhappy with their decision to participate. After the deal priced at the top of the R$12-R$15 range indicated, they began trading at R$17.83 on Brazil’s Novo Mercado, meaning that investors were able to reap a swift 19% return .
Pricing at the top of the range meant that deal proceeds have reached R$8.34 billion, equal to around $4.3 billion, and more than the R$7.2 billion that the selling shareholders had initially targeted. At the time of pricing, the deal was the largest IPO on the Bovespa stock market and only the fourth Brazilian equity offer overall in 2009.
In March, one of the company’s competitors, MasterCard’s payment processing business Redecard, had tested the waters with a R$2.2 billion ($1 billion) follow on offer of existing shares placed by Citi.
Following that, VisaNet announced its IPO in May and began to market the deal in June. This was the second attempt to list after it tried in September 2008 but found it impossible to gain a decent valuation for its shares at the time.
“We were supposed to bring the VisaNet IPO to market in September, but that was impossible after the IPO market closed following the financial crisis,” says Pavarina.
“We had gotten very close to launching the deal in the previous year, but decided to stop the process,” she adds. “When we felt that the IPO market was reopening again in 2009 we started marketing the deal straight away.”
A group of four large selling shareholders, comprised of Banco Bradesco, Santander, Banco do Brasil and Visa International had put existing shares on offer, together with a number of small banks which also put shares on offer. The group sold 559.81m shares in total after the transaction had been increased by 17% from 477.8 million shares originally and it took VisaNet’s free float to 40.3%. The shares were listed on the Novo Mercado, the market segment with the highest corporate governance standards on Brazil’s stock exchange.
Banco do Brasil, Bradesco BBI, Santander and JPMorgan Chase acted as joint global coordinators while UBS Pactual and Goldman Sachs were joint bookrunners. A further four banks were in the junior syndicate with Banco Espirito Santo, HSBC, Merrill Lynch and Banco Votorantim acting as co-managers.
Shares were offered to investors in Brazil, the US and in Europe, and foreign investors bought more than half of the deal, while a sizeable part of the offer– around 20% – was sold to retail investors and 5% was marketed to the company’s employees.
VisaNet’s IPO – as well as Redecard’s follow-on – came on the back of a strong performance of the credit card processing market that profits from a rising popularity of the cards highlighted by the boost in debit and credit card transactions, up 24.7% and 21% in the first quarter this year compared to last year, according to data from VisaNet. Its credit and debit card transaction volumes reached more than R$50 billion in the second quarter this year alone, but volumes peaked in the fourth quarter of 2008 and have slightly declined since then.
What makes the credit card processing sector attractive to investors is that companies receive a share of credit card transactions but do not take on the risk of cardholder default. Credit card operators for that reason generate strong cash flows, mirrored in VisaNet’s earnings of R$535.8 million from R$791.3 million of revenues in the first three months of 2009, giving it a healthy 67.7% profit margin.
However VisaNet’s strong ability to generate cash has almost come as a hindrance to its IPO plans, given that it had no obvious need for new capital. Although the IPO was a sale of existing shares some investors remained sceptical about the company’s listing plans.
“VisaNet and Redecard did not necessarily need to raise cash, unless they planned an acquisition,” comments Pavarina. “In the case of VisaNet it was therefore tricky to convince investors as to why the company was doing an IPO because it had no pressing need for money.”
Nevertheless, VisaNet has set the scene of what will be a lively IPO market in the country. Europe’s largest bank Santander will surpass VisaNet’s IPO in size when it prices the $7.2 billion listing of its Brazilian business at the end of September.
Pavarina estimates that up to $13 billion of listings can be expected to come to market in Brazil until the end of 2009 – not including Santander’s deal. Clearly reason for more international investors to take a look at Brazil.