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Nov 21, 2010

The world's biggest share issue

Petrobras’ varied investment story helps stoke demand for massive share sale

Raising $26 bn of cash in the current economic climate is little more than a pipe dream for the majority of companies. For Brazilian oil giant Petrobras, however, it has become a reality. The company’s alluring investment proposition helped it raise nearly $70 bn in the biggest share issue in history.

Ted Helms, Petrobras’ New York-based executive manager of investor relations, thinks it helps if you appeal to a broad church of investors. He says his company’s recent fund-raising success hinged on its ability to capitalize on all the angles. ‘Emerging markets, mega-cap, value... there is a wide range to our investment story,’ Helms observes.

Aided by a surge in demand for emerging markets stock, investor appetite may also have been heightened by the protracted run-up to the deal. The market had been aware of the forthcoming capital raising for 18 months but had to wait for government approval to sell the 5 bn oil barrels. ‘We had hoped the capital raising would occur much earlier than it did, because this overhang lasted for more than a year and our stock price was suffering,’ Helms explains.

Petrobras had envisaged completing the deal in July but that deadline was missed due to the legislative process and delays in valuing the barrels. ‘We had more than 100 people working on it in one form or another so we just had to get it done,’ says Helms.

When the deal finally went through it was helped along by favorable market conditions as US investors fought to cash in on the offering. The deal − a great source of pride for the Brazilian people − was immediately lauded by then-President Luiz Ignácio Lula da Silva as a triumph. ‘It wasn’t in Frankfurt. It wasn’t in London. It wasn’t in New York. It was in São Paulo,’ he announced to a packed hall of supporters at Bovespa, the Brazilian stock exchange, the day after the share issue.

Despite Brazil’s recent homegrown achievements, Helms still thinks the established exchanges have a role to play, especially in large-scale deals. ‘With a deal our size you need depositary receipts (DRs) and you still need the NYSE,’ he points out.

New structure
It wasn’t just cheery political rhetoric that resulted from the share sale; there was an altered ownership structure, too. The Brazilian government’s overall stake in Petrobras increased from around 40 percent to around 48 percent after the share issue, and it now owns a majority of the voting shares. This is something Helms thinks is unlikely to change Petrobras’ governance structure significantly, however.

The share issue resulted in a large number of non-domestic minority shareholders. The share allocation on the book-building was split evenly between Brazil and the US, with each having 39 percent. The Europeans bought around 10 percent of the shares, Asia about 3 percent and Canada about 6 percent.

Non-voting and voting shares were allocated in approximately the same ratio as Petrobras’ existing share structure, with the underlying shares still traded on Bovespa, while the company’s American DRs (ADRs) are traded on the NYSE. The voting shares represent around 58 percent of the total capital but, according to Brazilian law, the government must retain control, and it must do so with a majority of the voting shares.

‘There were a lot of people who knew us well, who had been waiting for this moment to establish a core position in our name,’ Helms observes. ‘In a sense, we were already very liquid and investors could always adjust to whatever position they wanted, without having to participate in the offering itself.’

Supply and demand
Despite that, demand to participate in the issue far outstripped supply. ‘There are some issues surrounding the market and priority,’ Helms concedes. ‘We had the complication that the total offer was split into two parts: a priority offer and a market offer, and the priority offer comprised 80 percent.’

Similar to a rights issue, the priority offer was available to existing shareholders of the underlying shares, with the exception of the ADR holders, who could not take part due to US securities regulations. ‘Consequently, we allowed for a market offer, where existing ADR holders and others could place orders in the book,’ Helms explains.

‘We expected there to be leftover shares from the priority offer. Instead, what happened was that the demand in the priority offering (the largely Brazilian component) exceeded our expectations. The government was not even able to subscribe up to the value of the barrels in the priority, so there was demand going into the book, rather than supply.’

How this demand will translate into long-term share price performance remains to be seen. After realizing its record-breaking ambition Petrobras must now sustain investor interest both in the short and longer term – especially if it is to mount a repeat capital raising in the coming years.