Santander Mexico eschewed the chance to price the IPO of its Mexican subsidiary towards the top of the range in favour of ensuring strong post-deal performance. Santander, which was left lead on the deal, said the bank would have lost some of the large bids from long-only accounts had it tried to move the price above the middle of the range. It therefore opted to price at the middle of its Ps29 to Ps33 range to generate Ps52.81 billion ($4.1 billion). The deal, which is Mexico’s largest ever IPO, has traded up 22% since the launch and, in part, helped the following month to be an exceptionally active one for Mexican equities.
The bank discounted to the only other comparable listed bank in Mexico, Banorte. The mid-point implied a valuation of a 2013 price/earnings ratio of between 10 and 11, compared with 12 for Banorte. The deal reportedly attracted $20 billion in orders and, according to Facundo Vazquez, head of Latin American ECM at Bank of America Merrill Lynch, contained more "quality" long-only accounts than any comparable deal he could remember.
Valuation
The price implied a valuation of €13.71 billion for 100% of Santander Mexico. In the first half of 2012 the bank’s profit attributed to the group was €556 million, up 14.4% on the first half of 2011 and was Santander’s third-highest-reporting business after Brazil (€1.15 billion) and the UK (€566 billion). Santander said the IPO was not driven by its need to increase tier 1 capital, but a source said it would raise this capital by 55 basis points. At the end of the second quarter the bank’s tier 1 capital (Basle II) was 10.1%
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Bankers on the deal say that the focus on post-deal performance during the pricing discussions was correct: "It was the right thing to do," says Vazquez, who points out that Santander Madrid’s determination to have a large and successful transaction – including the post-deal performance – meant that the pricing discussion was "almost uneventful" despite the deal’s size and complexity. "It also set a good tone in the equity markets, although the nature of this transaction will be very different to others in Mexico. It was high profile and liquid, and therefore worked very well for US and global investors. People were willing to put sizeable tickets without being concerned about future liquidity," says Vazquez.
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| Facundo Vazquez, head of Latin American ECM at Bank of America Merrill Lynch |
Santander, BAML, Deutsche Bank and UBS were the global coordinators, while Barclays, Citi, Credit Suisse, Goldman Sachs, Itaú, JPMorgan and RBC were joint bookrunners.
The week after Santander came to market, Promotora y Operadora de Infraestructura (Pinfra) priced a Ps4.43 billion equity follow-on, but at an 8.5% discount. Credit Suisse and JPMorgan managed the international portion, with Banorte-Ixe handling the domestic side. The week after Pinfra’s issuance, Citi, HSBC, JPMorgan and Morgan Stanley brought a follow-on from Mexichem that priced at Ps15.6 billion at a 2.9% discount, but then traded up 7.6% over the next couple of weeks. However, the real test for the post-Santander equity market came with Credito Real’s small ($200 million) IPO on October 18. Barclays and Deutsche Bank handled the international tranche of the niche financier’s listing, with Banorte-Ixe handling the domestic side. The company, which specializes in payroll and durable goods loans, failed to build on Santander’s momentum and priced at the bottom of its range. Its shares also traded down 3.1% on the first day of trading.
Mexico pipeline
Still bankers report a strong pipeline for Mexican equity deals and believe that the resurgence of interest from international investors in the country means they should be successful. "Mexico is like Brazil was 10 years ago," says Vazquez. "It’s a macro-call, essentially, and so investors will take a serious look at everything coming out of Mexico. It’s not a stock-picking strategy – it’s not about specific industries, companies or management – it’s more a case of investors trying to get exposure to Mexico, and so whatever paper – within reason – will have a strong chance."
While Mexico benefits from its renewed investor appeal, Brazil is struggling to provide a coherent investor story, according to equity bankers. "Investors are confused about Brazil – I am confused about Brazil," says an ECM banker who says that the central bank was increasing interest rates just 18 months ago and now they are "hellbent" on lowering them. Regulatory changes are also throwing uncertainty into the mix, and even if the changes are ultimately favourable to a company being floated, any regulatory uncertainty is problematic during roadshows and none of the ECM bankers interviewed in Brazil or elsewhere expects any IPOs before the end of 2012 – although some say there might be follow-ons.
