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DEAL OF THE YEAR: Initial Public Offering

Jan 1, 2013

Santander Mexico $4.1bn IPO

In another weak year for Latin America's equity capital markets, two long-awaited bank debuts stood out among the region's few IPOs.

Both had the international recognition not to be bound to the fate of the region's smaller deals, offering size and a clear expansion play and getting several times demand. Both were enormous successes, but in the end Santander Mexico's IPO was bigger, has performed better and is likely to represent more of a watershed moment for its country's equity markets than BTG Pactual's debut.

For years the Bolsa Mexicana de Valores directors' annual claims that next year will see "a few more IPOs" were met with smirks and giggles.

Buoyed by positive economic forecasts, a steadier pipeline of Mexican debutants now seems a reality. Santander's 52.81 billion peso ($4.11 billion) debut was the biggest Mexican sale in history and the region's largest IPO since Santander Brazil's $7.5 billion sale in 2009.

A slate of transactions - Pinfra, Crédito Real, and Mexichem - immediately followed. More were on the way as of December, including additional entrants into the new Fibra real estate fund asset class.

The deal was part of a divestiture plan by the Spanish parent that was long-expected and much needed. Demand for the 24.9% stake in what is perhaps the group's healthiest asset reached 4.8 times.

Following a three-week roadshow visiting 12 countries and 24 cities, some 20% of the deal was placed in Mexico and the remainder as American Depositary Receipts in New York, with 53% ending up in the hands of international long-only buyers.

Despite investor appetite, the shares were intelligently priced at the midpoint, rather than the high end of the proposed 29.00 to 33.50 peso band. The book included numerous investors that had not previously invested in the region.

"This is the first time that a Spanish-speaking Latin American company accesses the market in that magnitude and generates this kind of demand," says Gérard Crémoux, head of LatAm investment banking at UBS, global coordinator on the deal with Santander, Deutsche Bank and Bank of America-Merrill Lynch.

"There hasn't been a $20 billion book for a Spanish-speaking Latin American company ever. This is the beginning of a new trend."

Barclays, Citi, Credit Suisse, Goldman Sachs, Itaú, JPMorgan and RBC were joint bookrunners, with Santander, Banamex, BBVA Bancomer and HSBC managing the domestic portion.

"People aren't invested in Mexico," says Jeffrey Rosichan, vice chairman of ECM at Deutsche Bank. "Few stocks are liquid. Only one bank was listed, and banks make great proxies."

The new shares offered an important play into Mexico's financial space, becoming only the second large bank to be publicly traded. In addition to the FIG sector's proxy for the consumer demand growth play, Mexico's banking sector is famously underpenetrated in the country's population. The lack of clear comparables, however, presented something of a challenge, says Facundo Vazquez, head of LatAm ECM at Bank of America Merrill Lynch.

The shares were offered at a discount to the bank's slightly smaller rival Banorte, at around 10-11 times 2013 price/earnings compared with Banorte's 12 times. The deal valued the bank at more than $17 billion.

The shares have remained above offer price, and were up 21% at 37.98 pesos as of December 1. This came versus a 2.4% improvement in the Mexican index during that time.

Santander now plans to IPO its other major subsidiaries around the globe, with Argentina's Santander Río likely up next in LatAm - assuming the political climate in the country allows for it.

In an unusual year where ex-Brazil issuance was greater than Brazilian issuance, bankers, investors and others are hopeful the shift towards greater non-Brazilian deals is permanent. Brazil's large investment banks are beefing up their operations outside of Brazil in anticipation - even in Mexico, as Itaú's participation in the transaction demonstrates.

Even if the percentage of new ECM issuance in the region tips back in Brazil's favor in 2013 - and bankers say it could easily do so if the right names come at intelligent price levels - all signs point to a continued increase in volume from outside of Brazil.

While Santander Mexico undoubtedly is the most significant ex-Brazil deal in years and has created a tangible market opening, the permanent effects in Mexico's new issue market are far from clear. Liquidity, and the large volume the in the index of stocks of businesses controlled by industrialist Carlos Slim, remains an issue.

Moreover, the country's small and mid-size corporate owners are still more reluctant than the regional average to open their companies up to a public listing. The job ahead is difficult, but Mexico could not have asked for a better start. LF



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