SAO PAULO (Reuters) - When it comes to Brazilian initial public offerings (IPOs), geography sometimes still matters even in a globalized world.
For example, Brazilian credit card services company PagSeguro Digital Ltd (PAGS.N), which commanded a $6.8 billion valuation when it went public on the New York Stock Exchange (NYSE) in January, surpassed its bankers’ wildest expectations.
The forecast-beating flotation was mostly due to parent company Universo Online SA’s (UOL) decision to skip the local Sao Paulo exchange run by B3 SA Brasil Bolsa Balcão BVMF3.SA in favor of a market where companies in the fintech space fetch a better premium, people close to the deal say.
The decision underscores how Latin American bourses - long dominated by traditional companies like banks, consumer goods makers, telecoms and commodities plays - are struggling to lure tech start-ups.
If that trend continues, it could exclude exchanges like B3 from one of the Brazilian economy’s growth sectors.
B3 denies there is any wider trend of companies migrating to other markets. Of the 28 share offerings by Brazilian companies last year, only two were purely abroad and three were dual listings.
But Tiago Isaac, responsible for relations with issuers at B3, acknowledged that tech companies, which are a rarity in Brazil, are the exception.
“High growth tech companies only find a large pool of investors in the U.S.”, he said.
PagSeguro’s underwriters wanted it to be compared with U.S. fintech companies such as PayPal Holdings Inc (PYPL.O) and Square Inc (SQ.N) and not with slower growth local peers such as payment processor Cielo SA (CIEL3.SA).
PagSeguro focuses on digital payments accounts and sells point of sales devices rather than traditional merchant processing.
Its shares, which have rocketed 50 percent since its IPO price, trade at 33.4 times its forward earnings, a very similar multiple to PayPal’s 33.7 times.
That is more than double the multiple for Cielo, Brazil’s only listed credit card services provider.
“They wanted to tap a tech investor base that does not exist in Brazil’s stock exchange”, according to one person close to the matter.
The bet paid off. PagSeguro’s market capitalization of around $10 billion is nearly half of Cielo’s, despite the fact that its larger rival has five times the market share, according to Goldman Sachs’ estimates.
The IPO made the Frias family, controlling shareholders of UOL, Brazil’s biggest Internet content and services provider, into billionaires.
PagSeguro declined comment. UOL officials could not immediately be reached for comment.
In listing on Intercontinental Exchange Inc’s (ICE.N) NYSE, PagSeguro followed in the footsteps of other Brazilian companies such as zinc and copper miner Nexa Resources SA (NEXA.N) and online retailer Netshoes Ltd NETS.N.
Credit card processor Stone Pagamentos SA is also considering a New York IPO, Reuters reported in January.
To a lesser extent, the same might be true of mining, where Toronto has long been a magnet for offerings and recently lured Nexa Resources in a joint offering along with the NYSE.
Nexa Chief Financial Officer Mario Bertoncini said in a recent interview that Toronto has specific rules that allow miners to disclose estimates of reserves.
“Listing in Brazil would not bring additional demand for our IPO, since institutional Peruvian and Brazilian investors, where our operations are based, have easy access to international markets,” he said.
Still, Nexa’s foreign listing foray fell well short of PagSeguros’. The company is valued at 11 times its forward earnings, lower than First Quantum Minerals Ltd’s (FM.TO) 17 times or Southern Copper Corp’s (SCCO.N) 19 times.
Bertoncini says the multiples comparison is distorted by the fact that 65 percent of Nexa’s revenue comes from zinc, whereas most comparables concentrate on copper, and the price trends are different for both metals.
A smaller Brazilian company, Ero Copper Corp (ERO.TO), has listed in Toronto, and Sigma Lithium Resources Inc, a small Canada headquartered lithium miner all of whose assets are in Brazil, also plans a transaction soon, IFR reported last month.
Although Nexa priced its IPO at $16, below its initially expected price range of $19 to $21, its shares have risen 30 percent since the offering.
Only large companies have a chance of listing abroad, said Alessandro Zema, Morgan Stanley’s head of investment banking in Brazil.
“A large sized offering enhances liquidity and thus the attractiveness of a transaction,” Zema said, declining to elaborate on specific offerings.
Brazilian companies valued at less than $1 billion do not usually consider an IPO abroad, according to other bankers and lawyers.
Shoe, fashion and beauty online retailer Netshoes, valued at $557 million at the time of its April IPO, might have done well to follow that dictum.
The company’s shares have slumped 56 percent as it has struggled to turn a profit. Although investors are familiar with the e-commerce world, distance from its operations, exclusively in Brazil, made it harder to explain losses to investors, people close to the matter said.
Netshoes said in a note that its share price reflects investors’ expectations versus Netshoes’s performance, and is not related to its listing venue.
Meanwhile, dual listings such as Argentina’s Loma Negra, which priced its IPO last November in Buenos Aires and New York, remain much more common than deals which bypass local exchanges altogether. The company raised $1 billion in its offering.
“There are specialized investor pockets that concentrate in specific markets, and that’s where it makes sense to list the companies aiming to tap a certain investor base,” said Hans Lin, head of investment banking in Brazil at Bank of America Merrill Lynch.
Additional reporting by Alexandra Alper and Marta Nogueira; Editing by Christian Plumb, Diane Craft and David Gregorio