For daily news stories
@ visit http://www.ifre.comStoneCo’s IPO gets
Buffett boost
Equities Berkshire backing comes amid turmoilBY ANTHONY HUGHESWarren Buffett’s Berkshire
Hathaway will take nearly one-
third of the shares offered as
part of fast-growing Brazilian
payments processor STONECO’s
US$1.1bn Nasdaq IPO. The
anchor order has shored up
the deal amid signs that the US
new issue window may be
closing.
StoneCo began marketing
the sale of 47.7m Class A
shares at US$21–$23 each on
Tuesday for pricing on October
25.
Berkshire plans to buy up to
13.7m of those shares, 29% of
the deal.
%XISTINGûSHAREHOLDERSû4û
Rowe Price and Madrone
Opportunity Fund have also
put in for 9.5m and 2.4m
shares, respectively, through
non-binding indications of
interest.
That means that more than
half of the deal was spoken for
when marketing began.
“Payments processing is a
sector that is very resilient and
people love it,” said one banker
close to the deal. “But if you
wanted insurance that the deal
gets done, [Berkshire’s order] is
a pretty good way to do it.”
The deal comes after a rough
week for the US IPO market
that saw almost all deals either
lower their pricing sights or
defer their offerings due to
market conditions and
pressure on comparable
companies.SEEKING A PREMIUM
Berkshire’s support is
particularly helpful as StoneCo
is seeking a valuation
premium to its key peer,
0AG3EGUROû$IGITAL ûTHEû
Brazilian payments processor
that went public via a
US$2.6bn NYSE IPO in January.
PagSeguro shares trade at a
2019 EV/Ebitda multiple of 13.
times, whereas StoneCo iscoming north of 14 times on the
same metric, the banker said.
4HISûPREMIUMûISûBEINGûJUSTIlEDû
by StoneCo’s higher Ebitda
margins and faster sales growth.
3TONE#OûISûEXPECTEDûTOûREPORTû
û%BITDAûMARGINSûNEXTûYEARû
versus about 40% for PagSeguro.
4HEûUNDERWRITINGûBANKSûEXPECTû
StoneCo to grow sales at more
THANûûNEXTûYEARûVERSUSûABOUTû
40% for PagSeguro.
“It’s payments, it’s scale, it’s
growth and it has demonstrated
strong margins, so it checks a lot
OFûBOXES vûTHEûBANKERûSAID
Cielo, a payments processor
backed by Banco Bradesco and
Banco do Brasil, is another comp. It
trades at a more modest forward
EV/Ebitda multiple of 7.6 times.
The IPO terms would give
StoneCo a market cap of
US$6.2bn at the top end.
The deal comprises 40.9m
PRIMARYûSHARESûWHILEûEXISTINGû
shareholders, including
founders Andre Street and
Eduardo Pontes, are selling the
remaining 6.8m shares.
Goldman Sachs, JP Morgan and
Citigroup are acting as global
coordinators.
Berkshire’s involvement is no
accident. StoneCo’s board
includes one of the founding
partners of Brazilian private
EQUITYûlRMû'û#APITAL û
Berkshire’s investing partner in
+RAFTû(EINZ
Founded in 2012, StoneCo
generated net income of
R$87.7m (US$22.7m) from sales
of R$635.7m (US$164.9m) in the
lRSTûHALFûOFû ûTHEûLATTERûUPû
92% versus the same period in
2017.
The company claims about a
5.5% share of the Brazilian
payments market, which it says
is underpenetrated versus more
mature markets (the US, for
instance) and therefore has
greater growth potential.
StoneCo processed R$35.1bn
of total payment volume in the
lRSTûHALFûOFû ûUPûûversus the year-ago period. (^)
level since February 2014,
pushing the gap between BTPs
ANDû'ERMANû"UNDSûTOûBP û
10bp wider on the day and there
are concerns that volatility
could escalate further.
“While a rejection of the draft
budgetary plan likely has been
priced in by markets, the
eventual opening of an
EXCESSIVEûDElCITûPROCEDUREû
could further unsettle
sentiment,” Barclays analysts
wrote in a note.
!Nû%$0ûISûANûACTIONûLAUNCHEDû
by the Commission against an
%5ûSTATEûTHATûEXCEEDSûTHEû
BUDGETARYûDElCITûCEILINGû
imposed by the EU’s stability
and growth pact. It requires the
country in question to provide a
plan for corrective action.
The Barclays analysts added
that the government would try
to strike a balance between
confrontation and avoiding a
stance that escalates market
pressures.
“However, implementation
risks of this communication
strategy are high in our view;
hence, we do not rule out that
the verbal confrontation could
escalate,” the analysts wrote.
Bankers believe that while
there would be too much
EXECUTIONûRISKûAROUNDûAû
syndicated deal in euros, the
sovereign should look beyond
its home shores.
h!ûDOLLARûDEALûWOULDûmYûRIGHTû
NOW vûAûSENIORû$#-ûBANKERûSAIDû
h$EMANDûINûTHATûMARKETûHASû
been awesome, the currency is
strong, yields are high, central
banks’ participation is strong.
They would have an absolute
blow out.”
Italy has said it would return
to the US dollar market if costs
of funding were cheaper.
This is currently the case. The
283bp spread over mid-swaps
on its euro October 2023 bond
equates to 331bp over in US
dollars. Italy has a US$3.5bn
6.875% September 2023 bond
that was quoted at 256bp over
last Friday, according to
Tradeweb. (^)
Whether or not it has,
remains to be seen, although
the reopening of the syndicated
loan market last month was a
big boost for the sector.
In addition, even though
banks have US$102bn of debt
maturing within 12 months,
according to Fitch, some of that
is loans from stable sources of
funding, such as parent banks,
so there’s no urgent need for
banks to issue senior bonds.
Moreover, with economic
growth shrinking, banks have
curtailed their lending and with
outstanding trading levels still
prohibitive, there’s little
incentive to issue.
Akbank senior bonds due in
/CTOBERû ûFORûEXAMPLE ûAREû
bid at a yield of around 8.20%,
ACCORDINGûTOû2ElNITIVûDATAûnû
nearly 400bp lower than where
they were in mid-August but
still well above their 5% coupon.
“Is there a market for the
best banks? Yes. Are they
going to pay [the necessary]
coupons? I don’t think so,”
said the second banker away
from the sovereign’s deal.
PRESSURE POINT
A bigger pressure point could be
bank capital. Although Turkey’s
banks are relatively well
capitalised - with capital
adequacy ratios of between
12.5% and 20% for the leading
lNANCIALûINSTITUTIONS ûACCORDINGû
TOû%XOTIXûASûOFûEARLYû3EPTEMBERû
- balance sheets are likely to
come under increasing pressure
as the economy deteriorates.
But if Turkish senior bank
debt is still at elevated yields,
outstanding Tier 2 bonds
remain at stratospheric levels
even after a healthy rally.
Akbank’s 2027 bonds, which
are callable in 2022, may no
longer be trading at the 25%
yield they were quoted at in
early September but they are
still close to 14%.
Instead, banks may look at
alternatives such as the equity
MARKETSûnûASû9APIû+REDIûDIDû
earlier this year through a
rights issue – private
placements or selling risk-
weighted assets.
Additional reporting by Robert
Hogg (^)