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DEAL OF THE YEAR: Equity Follow-On

Jan 1, 2013

Taesa BRL1.76bn Follow-On

It was the follow-on that wasn't a follow-on.

Faced with a 3.5% free float, a miniscule amount of trading activity and a promise made to change all that, Brazilian utility Cemig faced a tricky task in selling 27 million units of its Transmissora Aliança de Energia Elétrica (Taesa) subsidiary.

The sale, which would really need to be a second IPO, had been in the works ever since the Brazilian utility had bought Brazilian transmission assets of Italy's Terna in 2009. Good windows for equity issuance in Brazil were few and far between.

Working in the transmission company's favor, however, was investor preference for defensive stocks. Taesa also offers shareholders a high dividend yield - its historical payout had been around 90% - and Taesa had indicated it would pay out more than 75% in the future.

"We rediscovered the dividend yield in LatAm," says Facundo Vazquez, head of LatAm ECM at Bank of America Merrill Lynch, which managed the sale with BTG Pactual, Banco do Brasil, Goldman Sachs and Santander.

The key decision, bankers say, was the decision to set a price range ahead of the sale, unusual for a follow-on, unprecedented in Brazil, and truly earning the title of "re-IPO."

Regulators would have preferred to avoid it. "This took some negotiation with the CVM," says Enrique Corredor, head of the ECM syndicate at BTG, noting months of conversation.

Once the issuer was finished with the regulators, investors also needed convincing.

"We used a price range based on the valuation of the research analysts and the current trading levels," says Pedro Leite da Costa, head of LatAm ECM at Goldman Sachs. The global investor education effort involved speaking to more than 110 accounts and included three research analysts.

Then there was the timing.

The Bovespa was sinking in July, and despite a successful IPO from BTG Pactual in April, there had not been a broad revival in the stockmarket's fortunes. Most of the other transactions in the June-July pipeline had been pulled or cancelled on the scheduled pricing day.

In the end, however, investors signed up for close to five times the shares on offer, with the transaction raising 1.76 billion reais ($876 million) and pricing at the midpoint of the 60 to 70 reais price range. The 27 million units sold - a unit is one ordinary and two preferred shares - included both the bankers' greenshoe overallotment option and a relatively rare LatAm example of using issuer 'hot issue' overallotment. Brazilians accounted for about 50% of the demand, with 30% coming from the US, 10%-15% from Europe and the remainder from LatAm ex-Brazil and Asia.

"The book included a lot of funds that hadn't invested in utilities in a while, and in particular we had a lot of non-LatAm money participate at the mutual fund level," Leite da Costa says.

Leite da Costa says the dividends were "towards the top end of what the comparables had been paying and that swayed a lot of investors". Utility-focused buyers and dividend hunters usually playing in the real estate income trust space came in much larger than they might for a typical Brazilian deal.

The stock was up 3.0% to 67 reais as of December 1.

Fortunately for Taesa, the sale came ahead of government tariff issues that hurt the market capitalizations of some Brazilian utility stocks. At the time of the deal, investors saw Taesa standing out from a regulatory perspective - a concession with few surprises. LF



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