Brazil IPOs Canceled as Prices Top Profits While Bovespa Gains

By Michael Patterson and Paulo Winterstein
May 21 (Bloomberg) -- Brazil, the world's best-performing equity market, has more companies canceling initial public offerings than any nation except the U.S. after 66 percent of last year's new stocks were money-losers.
Norse Energy do Brasil SA, Banco Fibra SA and 17 other companies in Latin America's biggest economy postponed or withdrew IPOs in 2008, according to data compiled by Bloomberg. So far this year, three Brazilian companies went public, raising 780 million reais ($473 million), compared with 59 that sold 53.2 billion reais of new equity in 2007.
Investors abandoned the IPO market even as the Bovespa index rose 15 percent after most of last year's issues fell below their offer price. Brazilian companies that went public in 2007 after reporting a profit the year before sold shares at a median price- to-earnings ratio of 40.6 times, Bloomberg data show. That compares with 22.4 in China and 16.9 in India, where the economies are growing about twice as fast as Brazil.
``It was very clear that the market was probably overshooting,'' Roberto Egydio Setubal, chief executive officer of Banco Itau Holding Financeira SA, Brazil's second-largest non- government bank, said in an interview in Sao Paulo. ``This year probably will be more selective.''
The pace of IPOs typically rises when shares rally. In the U.S. where the Standard & Poor's 500 Index is down 3.7 percent this year, 40 sales have been canceled. Elsewhere in the world the total is 58.
Bovespa Record
``When you're in a bull market, you get a lot of IPOs overpriced,'' said Mark Mobius, who oversees about $47 billion in emerging-market equities as the executive chairman of Singapore- based Templeton Asset Management Ltd. ``It's not only true of Brazil, it's true of other markets.''
The 66-stock Bovespa index climbed more than six-fold since the end of 2002 as rising demand for Brazil's sugar, steel and oil boosted profits at commodities producers and falling interest rates spurred faster economic growth. S&P awarded the country an investment grade credit rating for the first time last month.
The Bovespa rallied to a record yesterday and outperformed the 20 biggest equity markets this year amid a global retreat in share prices sparked by the collapse of the subprime-mortgage market. Benchmark indexes in China and India lost more than 15 percent.
Below IPO
Industries that accounted for most of Brazil's IPOs last year -- banking, real-estate and consumer products -- are underperforming the Bovespa after the central bank raised interest rates last month for the first time in three years to cool inflation.
Iguatemi Empresa de Shopping Centers SA, a Sao Paulo-based operator of malls that sold shares last February for 42 times 2006 earnings, is trading 18 percent below its initial offering price. Bolsa de Mercadorias & Futuros-BM&F SA, the derivatives exchange that merged with Bovespa Holding SA, dropped 8 percent since the Sao Paulo-based company sold shares in November for 100 times profit. Acucar Guarani SA, a sugar processor also based in Sao Paulo, retreated 26 percent since its offering in July for 52.7 times earnings.
The prospect for higher interest rates and weaker consumer spending suggests profit forecasts are overstated, said Nick Field, who helps oversee $27 billion in emerging market equities, including about $9 billion in Brazilian stocks, at London-based Schroders Plc.
The central bank may increase its overnight rate target to 13.75 percent this year from 11.75 percent to curb the fastest rise in consumer prices since 2006, Sao Paulo-based Itau said this week.
`Massive Future Growth'
``In a world where you have more inflation concern and rising interest-rates, where there's more earnings uncertainties and macro uncertainties, people are less willing to pay for massive future growth and rather want growth now,'' Field said.
About 252 companies sold shares valued at $55.5 billion through IPOs worldwide this year, according to Bloomberg data. That's down from 478 deals and $85.1 billion during the same period in 2007, a record year for initial sales.
Norse, a Rio de Janeiro-based oil and gas explorer that canceled its sale last month, said it wants to gauge investor demand for other IPOs before reviving the offering. Norse planned to sell 23 million shares for about 18 reais each, or about 383 times reported profit for 2006, according to data compiled by Bloomberg.
``We're not urgently in need of funding so we can buy ourselves a little more time,'' said Anders Kapstad, chief financial officer of Norse Energy's Oslo-based parent Norse Energy Corp. ASA.
`Doesn't Make Sense'
Banco Fibra, a Sao Paulo-based commercial lender, withdrew its offering this month after the U.S. subprime mortgage-market's collapse sent financial shares tumbling worldwide. The MSCI World Financials Index has declined about 15 percent since Banco Fibra filed its IPO prospectus in August with the nation's securities regulator. Cassio Von Gal, the firm's finance chief, said Banco Fibra may pursue a private share sale instead.
``All bank stocks are down,'' Von Gal said in a May 14 interview. ``It doesn't make sense to enter the market now.''
Importacao Exportacao e Industria de Oleos SA, an Araucaria- Brazil-based soybean oil producer, postponed its IPO in March. Luiz Antonio Cavet, chief financial officer of the family-owned firm, said ``cautious'' investors prompted Imcopa to wait until markets improve.
The company is selling debt to finance operations and plans to offer shares ``when the moment is favorable,'' Cavet said.