Santander's Brazilian IPO: Around the world in 18 days

The tailwinds of a banking crisis, wildly unpredictable currency movements, low deal flows in equity markets and yo-yoing prices on the faintest whiff of global interest rate actions do not seem auspicious for a jumbo, dual-listed international equity action.

Stir in a tight deadline and roadshows that encompass four continents and Brazil's biggest ever initial public offering (IPO), and you have the recipe for sheer purgatory. That makes it all the more impressive that Credit Suisse (along with Bank of America Merrill Lynch, BTG Pactual and UBS), was able to pull off the IPO of Banco Santander Brasil, the largest in the world so far this year.

Santander's decision to carve out its Brazilian banking unit has deep roots. It was first discussed back in 2006, says Mark Rosen, managing director and a member of the global financial institutions group at Credit Suisse. His primary responsibility is coverage of financial institutions in Latin America.

The capital raising aimed to take advantage of the impressive growth opportunities presented by this exceptionally lucrative market. Mr Rosen believes that credit markets in this country of 190 million should grow 20% to 25% next year as ever more Brazilians join the consuming class. In addition, that growth is likely to last, as loan penetration has only just touched 45% of gross domestic product, compared to Chilean rates of more than 60%.

The idea took a back seat when the Spanish bank acquired the Brazilian assets of ABN Amro, including its powerful Banco Real franchise, last year. Bolting together a highly complementary set of franchises - through credit cards, general banking and lending to mid-sized companies - gave Santander a highly promising platform. Mr Rosen believes that the acquisition not only gave Santander critical mass, but significantly enhanced the quality of its staff. "The bank went from a good-sized institution to a market leader," he says.

However, in spite of this growth, the Spanish bank was not overtaking its main rivals. Others were also targeting the Brazilian financial sector for bold acquisitions. The fusion of Banco Itaú and Unibanco last year, as well as a number of acquisitions by state behemoth Banco do Brasil, were transforming the landscape. It was imperative for the Spanish bank to strike.

Deal strategy

Winning the deal for Credit Suisse was a question of playing on two strengths. The relationship between Santander and Credit Suisse in Latin America is already a deep one; Credit Suisse's Brazilian office led a deal to sell Santander's stake in electricity producer AES Tietê in 2005.

The Swiss bank's Spanish office had already founded the Chilean banking business of Santander and carried out deals for its Mexican bank.

Credit Suisse is also very well known in the Brazilian market, says José Olympio Pereira, the bank's managing director and head of investment banking for Brazil, based in São Paulo. Indeed, over the years, he says it and erstwhile rival UBS have been the main story in town. The financial crisis buried the business of UBS in Brazil, which wound up selling its Pactual investment banking business to BTG (and back to former Pactual boss Andre Esteves), leaving an uncrowded market for Credit Suisse.

Ultimately, Santander picked two lead banks - itself and Credit Suisse - plus two joint bookrunners, Bank of America Merrill Lynch and BTG Pactual, and four co-managers. According to participants, Santander did not play competing banks off against one another to bring down the fees. Despite media reports that a parsimonious 0.5% had been paid, the real transaction figure was 1.75%.

Acting fast

It is perhaps the timing, rather than the scale of the deal or the choppy markets, that makes Credit Suisse most proud of pulling off the deal. In November, the Brazilian market started to pull out of the nosedive that had sliced more than 50% off the value of its main index. Even so, volatility continued through April.

"Santander was determined to get the deal placed fast, and asked us to complete by September," says David Hermer, Credit Suisse's managing director in the syndicate division of the equity capital markets group, based in New York. "It is a process that generally takes six months; we were able to complete it in three."

A critical decision was taken not to outsource the management of the roadshows. Mr Hermer is convinced that the decision was correct, but acknowledged it was a logistical nightmare. Execution was two and a half weeks from start to finish and the teams needed to cover four continents. Three core teams were created to travel the world: one team roved Asia and the Middle East, a second covered Europe, and a third the US; two of those teams kicked off in Brazil.

In a grand finale, the bank managed to split the teams to create five travelling caravans, with up to eight meetings per day to cover 150 accounts on a one-to-one basis and hundreds more in group meetings. The running around paid off with a diverse cross-section of investors both geographically and by type.

"We knew that we would have to have an extensive marketing campaign and success hinged on bringing in a wide range of investors from across the world. The book was truly global, covering institutions in Brazil, US, Europe, the Middle East and Asia," says Mr Hermer.

The deal illustrated the continuing predominance of US and European investors in Latin America, despite the talk of sovereign funds from the Middle East and Asia. "Large Middle East and Asian funds were helpful and additive, but were not the driver," says Mr Hermer.

The New York listing helped attract new kinds of US clients, including 'cross-over' buyers, as well as the usual suspects - dedicated emerging market and Latin America funds. In addition, Santander is one of the largest banks in the world, which has emerged from the crisis with reputation enhanced; the bank's juicy growth story almost ensured the Santander Brasil deal marketed itself, says Mr Rosen.

If anything else was needed to make this an attractive proposition, the IPO was a vehicle to raise capital for additional investment in a priority country, and Santander planned a programme of cost-cutting - in which it has proven expertise.

"Even under such difficult market conditions, we had no concerns about the absorption of the deal coming from a promising country such as Brazil, with a franchise issuer like Santander Brasil," says Ernesto Cruz, Credit Suisse's managing director and global head of equity capital markets.

Pricing and After-market

Getting the pricing right against the backdrop of a jittery market was a tense process. Santander's roadshow also drew attention to other major Brazilian banks, whose stocks rose as investors digested prospects for the industry.

In the end, it was decided to price the deal at the exact mid-point of R$23.5 ($13.8) in a range of R$22 to R$25. There was a good deal of oversubscription at that price, notes Mr Hermer. It also gave some wiggle room as it priced the deal at a discount to key fundamentals of the two other major Brazilian private sector banks, Bradesco and Itaú Unibanco, he adds. The deal finally raised $8.04bn for Santander, with listings on Bovespa and the New York Stock Exchange.

Then the problems started. The share price slid on the first day of trading, and media headlines dubbed the deal a flop. Fernando Abril-Martorell, managing director and CEO of Credit Suisse Spain, says: "Santander is very knowledgeable [about] how the markets work and the fact is that it turned more negative shortly after the floating, " he says. "As the company develops its business plan I have no doubt that the stock will trade up."

The stock sagged in the immediate aftermarket, before slowly rising above the issue price. Then in the fortnight following October 19, there was a sell off in Brazil because of the introduction of a tax on investor inflows, and a retraction in emerging markets globally. Santander Brasil's new stock followed the emerging market trend.

One of the problems in the immediate sell off was retail investors. Such investors in Brazil are not typically buy and hold but tend to flip the stock for an immediate profit. "[A lot of] stock comes back and this is consistent with other deals that we've seen in Brazil," says Mr Olympio. The market operator Bovespa has even tried to create other mechanisms to reward investors that do not sell the next day, he adds.

The retail component in the US also proved unpredictable. "There's no doubt that on the first day of trading, selling pressure was heavy out of US retail placements. If we could change anything it would be our allocation to this segment," says Mr Hermer. Despite the price volatility, the Santander deal has proved that in the right market for the right bank, jumbo deals are still possible. Not only that, it demonstrates that for multinationals, carve-outs of local businesses can generate real value.

Mr Cruz believes there is room for more of the same: several large global companies with significant assets in Brazil may have the same motivations to raise capital, highlight the value of their subsidiary and provide currency for acquisitions.

That is especially true in the banking market where a handful of multinationals have significant, successful local franchises. The Latin banking market is coming back to life and new equity raising deals are likely.