It was the follow-on that wasn't a follow-on.
DEAL OF THE YEAR: Equity Follow-On
Taesa BRL1.76bn 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
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
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
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
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