Last year saw a burst of activity in Latin America’s new issues market after three slow years, with activity concentrated mainly in the region’s two largest and strongest economies – Brazil and Mexico. Nine private-sector companies raised $5.51 billion in fresh equity during the year, with a heavy concentration of issues from telecom and technology companies. The biggest splash came in June, with a heavily over-subscribed $1.84 billion secondary issue of Merican Depostitary shares from Telmex, the Mexican telephone company.
This was the largest-ever, non-privatization equity offering by a Latin American company and it is our private-sector equity issue of the year. The deal further cemented Telmex’s status as the region’s most liquid stock and a core holding for investors in Latin American equities. The transaction enabled France Télécom, a longstanding minority investor in Telmex, to exit the company and use the proceeds from the sale of its 7.1% stake to focus on the European market. Telmex itself bought a third of the $2.8 billion worth of shares sold by France Télécom, leaving $1.84 billion for the market.
Strong demand from a high-quality range of investors enabled Morgan Stanley Dean Witter and Salomon Smith Barney, joint bookrunners, to price the stock at $53.25 per ADS, without having to concede a discount. Even so, the stock traded up in the after-market, although it subsequently lost steam, dropping 14% by the end of December. The bookrunners timed the issue to make the most of investor excitement over Mexico’s trouble-free presidential election in July and to benefit from continued appetite for Latin American telecom assets, especially from a large well-managed company like Telmex.
Leaving Room for the Upside
However, Telmex was something of an exception last year. Most companies had to accept lower valuations to make it to market. Several fund managers say a more selective investor base and weaker markets have forced companies to be less aggressive in their pricing than during the last Latin equity bull market in 1995-97. Issuers must now leave room for some upside in the after-market.
Juan Bosch, a portfolio manager at Compass Group, says, “It is good to leave money on the table for investors. It’s important for investors to do well if we want to develop Latin America’s capital markets and for companies to come to the market again in the future. They need to be seen as an asset class, not an opportunistic trade.” Another US-based investor agrees with Bosch saying, “In the past, prices for bonds were better for the issuer. But prices have come down now and it is more of a win-win situation for the issuer and investor alike.”
Three other telecom companies issued shares last year. Telecom Argentina, the French-Italian fixed line operator, Iusacell — the Mexican cellular company controlled by Verizon of the US and Vodafone of the UK — and Unefon, another Mexican mobile phone company, raised an aggregate $487.9 million in fresh equity last year.
The Telmex offering overshadowed a remarkable $1.1 billion secondary offering in January 2000 by Grupo Televisa, the Mexican media empire. This issue, led by Merrill Lynch, marked the return of large-scale of Latin American issuers to the markets after a long absence. The issue was part of the group’s successful balance sheet reorganization (see Corporate Bond of the Year, page 32). Televisa’s offering was upsized 18.7% to 16.5 million GDSs from an initial filing size of 13.9 million.
Another well-received issue last year was a secondary offering by Embraer, the Brazilian regional jet manufacturer, which raised $388.5 million in July. Investors liked its strong management, its heavy export order book and the chance to gain exposure to a fast-growing industry. Merrill Lynch and Morgan Stanley Dean Witter, joint bookrunners, marketed Embraer as the first publicly traded company providing a “pure play” investment in the regional jet industry.
Embraer Flies High
The company was marketed to aerospace, global, emerging market and dedicated Latin American investors. The stock rose 16.6% on the first day of trading and performed strongly for the rest of the year with a 72% rise in the five months to December.
Votorantim Papel e Celulose (VCP), a Brazilian paper and pulp producer and an unmistakably old economy name, made a successful debut in New York last April in the wake of the Nasdaq rout. The offering was two times oversubscribed in spite of the turbulence in the US equity markets and attracted high-quality, long-term investors. Merrill Lynch says the book was “primarily built on orders from value and dedicated emerging market funds with very little presence of hedge or speculative funds.”
A few Internet and new technology companies managed to come to the market ahead of the collapse of the Nasdaq in March and April but they fared badly. Impsat, the Argentina-based broadband network, raised $195.5 million in January through Morgan Stanley, but has since lost most of its value. IdeiasNet, a São Paulo Internet incubator which raised $17.9 million from local investors in May, was the first Latin American new technology company to go public locally.