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Brazil sees world’s biggest ever share issue

Brazilian economy | Brazil sees world’s biggest ever share issue Anthony Harrington

Until now the record for the world’s biggest ever rights issue has been held by the Japanese telecoms giant, NTT, which raised $36 billion in 1987. This dwarfed even the $24 billion raised by the Royal Bank of Scotland in June 2008 (a controversial issue if ever there was one). However, the Brazilian oil giant Petrobras has just raised the bar with a gargantuan $70 billion issue.

Although there was excess demand for the issue, which guaranteed that Petrobras and its bankers would get the paper away with no difficulty, the issue has been highly controversial, raising questions about the rights of minority owners when a government has a large stake in an oil company.

There were several different concerns in the run up to the sale, which took place on Friday September 24. Initially there were concerns that there would not be sufficient appetite from minority shareholders for the deal, since Petrobras was said to be looking for between $35 billion and $40 billion from minority shareholders and $43 billion from the Brazilian government. Several other much smaller Brazilian rights issues by public companies have come up short in recent months. In fact the offer was oversubscribed, so that fear fell away.

Along with that fear there was concern that minority shareholders would be diluted and that the Brazilian government, which has hitherto been praised for taking a very balanced approach to this massive instance of public private sector partnering, would start to ride over the interests of minority stakeholders.

While the success of the sale has taken the steam out of the dilution debate, market commentators are at one in seeing the government having a stronger grip on Brazil’s oil and gas production post the sale.

Petrobras plans to use the proceeds from the sale to fund an ambitious five year capex programme to exploit massive reserves, and in the process, turn Brazil into a major oil producer. According to the Wall Street Journal,

the company expects to double oil output to 3.9 million barrels a day by 2014. This would make Brazil the world’s fifth largest oil producer and would put it in contention for a place in the world’s top ten oil exporters.

The Brazilian Government received $42.5 billion worth of shares in return for transferring to Petrobras the rights for 5 billion barrels of deep-sea oil, located in the so-called “pre-salt” strata.

Demand for the sale was strong and Petrobras and its backers were able to get the deal away for a very nominal discount of 2% on the quoted share price. (Compare this to the deep discount of 59.5%, for example, that Lloyds Bank had to concede in getting its November 2009 rights issue away!)

Originally, analysts had been unhappy with the $42.5 billion oil-for-shares swap with the Brazilian government, arguing that it disadvantaged minority shareholders. Time will tell if there was substance to their fears. The Petrobras board will be breathing a sigh of relief that the deal is now done. Concerns over the coming issue had knocked some 27% off the company’s share price through 2010. Getting this mammoth deal out of the way is thought to clear the way for further large share offers on the Brazilian market – though none will be on this gargantuan scale. Companies had not wanted to compete for capital with a giant like Petrobras soaking up everything in sight. Those concerns at least are now done with, and companies with an eye to an issue will be delighted at the appetite displayed by investors. Whether this appetite will generalise to non-energy stocks, however, remains to be seen.

Further reading on share issues, raising capital, and the Brazilian economy:

Tags: Brazil , brazilian economy , energy markets , oil rights , Petrobras , rights issues
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