Brazil’s BB Seguridade, Smiles SA Conclude IPO’s

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Brazil’s BB Seguridade Participações SA sealed the world’s biggest initial public offering in seven months at a time when confidence in the South American giant has ebbed because of concerns about high inflation and mounting government interference in some sectors of the economy.

BB Seguridade, the pension, annuity and insurance unit of state-controlled Banco do Brasil SA, raised 11.48 billion reais ($5.74 billion) in the share offering on Thursday, the world’s largest IPO since Japan Airlines Co Ltd’s $8.5 billion listing last September, according to Thomson Reuters data.

A successful pricing of BB Seguridade, alongside that of frequent flyer program Smiles SA, brings a much-needed confidence boost to an IPO market that just a few years ago was one of the world’s hottest. Stung by a string of deals that failed to deliver promised returns, investors have for the past two years turned extra cautious on Brazil, casting a dark cloud over a pipeline of potential IPO transactions this year.

“Markets have been attentive to the potential of Brazilian IPOs,” said David Menlow, president of IPOFinancial.com, a firm specializing in analyzing IPO trends. “If (the country) gets things back on track, activity may become favorable.”

Companies might be taking advantage of increased liquidity and demand for higher-yielding assets like emerging market stocks to raise funds for expansion, Menlow noted. Only three Brazilian companies held IPOs in 2012, down from 11 each year in 2010 and 2011 and a record 64 in 2007, according to Thomson Reuters data.

STRONG APRIL
This April became the strongest month for IPOs in Brazil since June 2008, when 15.1 billion reais [$7.527 billion] were raised in two transactions. So far, sugar and ethanol producer Biosev SA, Alupar Investimentos SA, Smiles and BB Seguridade fetched a combined 14.3 billion reais [$7.133 billion] this month.

Earlier on Thursday, Smiles and main shareholder Gol Linhas Aéreas Inteligentes SA raised 1.13 billion reais [$563.67 million]. Smiles sold 52.17 million shares at a price of 21.7 reais [$10.826] each. The suggested price tag for the stock was between 20.70 reais and 25.80 reais each [$10.327 and $12.872].

Bankers in the deal told Reuters that demand for the Smiles deal topped five times the amount of shares on offer. An order worth 400 million reais [$199.5 million] from U.S. buyout firm General Atlantic LLC helped fuel demand for the Smiles IPO, they added.

A source with direct knowledge of the BB Seguridade deal told Reuters that demand was more than double the amount of shares on offer. About 675 million common shares of BB Seguridade were sold at a price of 17 reais [$8.481] – the suggested price range was between 15 reais [$7.483 and 18 reais [$8.98].

Smiles will bear the symbol “SMLE3” on the São Paulo Stock Exchange, while BB Seguridade will have the symbol “BBSE3.” Both stocks are scheduled to begin trading next Monday.

Brazil’s once-hyped IPO market is slowly rebounding yet not as swiftly as some bankers hoped, as investors remain skittish over the risk of overpriced deals, flagging economic growth and the impact of heavy state interference in some areas of the economy, such as the electricity and banking sectors.

Potential transactions for the coming months include an IPO of Votorantim Cimentos SA, the nation’s largest cement maker, and Autobrasil Participações SA, a dealership of second-hand cars.

POCKETING GAINS
Foreign investors, traditionally the largest buyers of Brazilian IPOs because of their strong shareholding culture, were expected to snap up half the shares on offer of BB Seguridade. Brazilian pension funds were also expected to participate actively in the deal.

Investors were drawn to the BB Seguridade deal as insurance grows bigger in the business model of Brazilian banks. Record low interest rates, stable household income and a strong job market are boosting demand for retirement packages and health and auto insurance.

Brazilians spend less than a tenth of the amount Britons or Americans do on insurance products and, as the middle class grows, insurers are luring new clients by transforming traditional, costlier policies into cheaper products.

Banco do Brasil expects to pocket a gross profit exceeding 8.3 billion reais with the sale of its stake in BB Seguridade, according to a securities filing.

The Smiles IPO allows investors to take advantage of Brazil’s growing middle class. Some of the beneficiaries of that change in the country’s demographics were airlines, which saw their customer base grow enormously, with many clients joining loyalty programs.

The Smiles IPO should bolster the finances of Gol, which for the past year has struggled with surging costs, rising debt and an economic slowdown that hampered demand for air travel.

Both transactions are a boon for local investment banks, which are vying for the largest, most lucrative deals in the Brazilian equity market with foreign counterparts.

Banco do Brasil’s investment banking unit handled the BB Seguridade deal, with co-managers including Banco Bradesco SA , Itaú Unibanco Holding SA, JPMorgan Chase & Co. Other investment banks working on the transaction include BTG Pactual Group, the largest equity underwriter in Brazil last year, and São Paulo-based Brasil Plural Banco Multiplo.

Smiles hired the investment banking unit of Credit Suisse Group for the deal. Banco do Brasil, Itaú, Morgan Stanley & Co, Deutsche Bank AG and Banco Santander SA acted as co-managers.