FROM THE ECONOMIST INTELLIGENCE UNIT
VisaNet, Brazil’s largest card payment processor, has become the new star of Brazil’s recovering capital markets. Shares of the Brazilian affiliate of the US-based credit card company Visa soared 11.8% on January 29th during their launch on the São Paulo stock exchange Bovespa, hot on the heels of a successful IPO that allowed VisaNet to raise R8.4bn (US$4.3bn).
The transaction, whose value may eventually reach R9.7bn if the controlling shareholders decide to increase the sale of their shares, already stands as the largest IPO of all time in Brazil, and indeed the largest that has been registered in the world for more than a year. In spite of the lingering uncertainty surrounding the global financial markets, it marks a significant return of international investors’ appetite in one of the key emerging markets.
Commanding lead in a growing sector
VisaNet has enjoyed a commanding position in the fast-growing credit card business in Brazil (with a 47% market share). This puts it ahead of Redecard, which issues MasterCard-branded credit cards (33%). Credit activity has expanded rapidly in Brazil, but as a large part of the population has remains underbanked, there is still great untapped growth potential for credit cards. The number of credit cards rose from 3.7m in 2006 to 5.3m last year, according to the Associação Brasileira de Empresas de Cartões de Credito e Serviços (Abecs, the credit card companies’ association in Brazil).
Transaction volumes have rapidly increased, mainly thanks to the proliferation of debit cards among the growing middle class, but they have remained relatively low by international standards. They currently stand at 22% of private consumption, according to Raymond James. The brokerage firm sees one the greatest growth potentials in the world in the credit card business in Brazil, where it has forecast an annual growth in transactions of 16% over the next five years.
Indeed the performance of the Brazilian economy, driven by strong domestic demand, has whetted investors’ appetite again. Credit activity, which is now equivalent to 42% of GDP (thanks to a 20% annual expansion since 2003) has been supported by state-owned banks. It has kept expanding (albeit at a slower pace than in 2006-08) in a further sign that the Brazilian economy has somewhat managed to avoid the worst of the credit crunch. Shareholders have also seemed to shrug off concerns about rising levels of payment arrears and the declining trend in the benchmark Selic rate in Brazil – probably because interest rates charged on credit cards have remained among the highest in the market, which has made it a very profitable business.
Long road to a big offering
Before the IPO, VisaNet was controlled by Bradesco, Brazil’s second largest private bank (39.3% of the shares), Banco do Brasil, the largest state-owned bank (31.6), Santander (Spain, 14.9) and Visa International (US, 10), while others owned 4.2 of the shares.
A first attempt to launch VisaNet’s IPO was postponed last year because of adverse market conditions. But the decline of risk aversion and the healthy rebound in the Brazilian bourse in recent weeks (to more than 50,000 points at present, compared to a peak of more than 70,000 points last year) laid the ground for a fresh, and successful, debut.
The VisaNet IPO was the first such offering in Brazil in a year, and was larger than the June 2008 launch of OGX Petróleo of the billionaire Eike Batista on the São Paulo stock exchange. It also dwarfed other IPOs of the past three years, such as the exchanges Bovespa Holding and BM&F (the two later merged) and Redecard.
End of the IPO diet?
Last year, the capital market went on a severe IPO diet, with just four transactions, compared to the record number of 67 in 2007. Foreign investors, especially institutional ones, now seem back in business. They accounted for some 80% of VisaNet IPO, according to BM&F Bovespa officials. This is an encouraging sign. Meanwhile, retail investors got less than 40% of what they had subscribed for.
Some may see the spectacular success of the VisaNet IPO as a prelude to other deals in Brazil, as the economy is expected to turn the corner during the second half of the year.
No company has yet filed for another IPO so far, although several secondary offers are being prepared. Nevertheless, there is little doubt that investors will remain very selective for some time and aim only for large and liquid deals, in a sharp contrast to euphoria that the market experienced in 2007. Indeed, few will be able to offer the international prestige of the Visa brand and mobilise the international investor community in such a big way.
In global terms, VisaNet also ranks well ahead of other deals completed this year, such as China Zongwang Holdings or Vodafone Qatar. It is far ahead of smaller deals in the US – such as Mead Johnson Nutrition and DigitalGlobe, according to Dealogic, a UK financial consultancy.
The deal is a measure of the power of attraction of the Brazilian equity market, which still has a lot of space to grow if it wants to become an important source of corporate financing. Indeed last year, only 2% of funds invested by listed companies in Brazil came from share issues, according to the Fundação Getúlio Vargas (FGV, a local think tank and business school). Meanwhile, 98% came from companies’ own resources or bank loans. This imbalance may be changing in the medium to long term.