BRAZILIAN CAPITAL MARKETS - MORE INITIAL SHARE OFFERINGS IN

UNCLAS SECTION 01 OF 02 BRASILIA 000835

SIPDIS

SENSITIVE
SIPDIS

NSC FOR CRONIN
TREASURY FOR OASIA - DAS LEE, FPARODI
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA
STATE PASS USAID FOR LAC

E.O 12958: N/A
TAGS: EFIN ECON BR
SUBJECT: BRAZILIAN CAPITAL MARKETS - MORE INITIAL SHARE OFFERINGS IN
2006



1. (SBU) Summary: Brazilian companies, always interested in
obtaining access to cheaper capital than that on offer by the
banking sector, have been turning more and more to equity offerings
on the Sao Paulo stock exchange (BOVESPA). One particular slice of
the market, the BOVESPA's "Novo Mercado" (New Market),which has
enhanced requirements for transparency, accounting standards and
protection of minority shareholders, has been attracting substantial
new offerings. In addition, a major fixed-line telephony provider,
Telemar, recently announced its intention to move its listing from
the traditional BOVESPA to the Novo Mercado; it would be the largest
company to do so. To qualify, it will have to convert its
non-voting shares into voting ones and comply with Brazilian
Generally Accepted Account Practices (GAAP),among other measures.
While the growth in the IPO market is slow and will not have much
short-term impact on the availability of financing options for
Brazilian companies, it represents a healthy trend and an attractive
option for some companies. End Summary.

Growth in the Capital Market
--------------


2. (U) Brazilian capital markets are expected to continue to develop
in 2006. The market valuation of Brazilian companies grew from 55%
of GDP in 2004 to 63% of GDP in March 2006. (By comparison, the
market value of Chilean stocks reportedly is 120% of GDP.) The
volume of daily trading has grown substantially, from Reals 689
million (US$ 235 million) in 2002 to Reals 2.3 billion (US$ 2.1
billion) in the first quarter of 2006. Foreign holdings increased
10 percentage points over the same four years, from 26% of BOVESPA
market valuation in 2002 to 36% in 2006. Overall, Brazilian stocks
have been among the best returns in the world for the last two
years, with the value of the companies listed on the BOVESPA rising
76% since 2004.


3. (SBU) But while the overall numbers look relatively healthy, over
the same period there has been little IPO activity. Although
between 2001 and 2003 there were only 2 IPOs, although the market is
showing some recent growth. It is as yet slow growth, with limited
short-term impact on the overall financing picture for Brazilian
companies, but, in the first quarter of 2006, 6 companies were in
the process of making their initial public stock offerings (IPOs)
and another 9 had begun the registration process to do so with the
Brazilian Securities and Exchange Commission (CVM). These IPOs
would be worth about Reals 7.12 billion (about USD 3.3 billion at
current exchange rates). Companies interested in going public are
trying to speed through the IPO process in the early part of the
year, well before the October elections, which could generate some
financial market uncertainty. By comparison, in 2005 there were 13
IPOs worth about Reals 14 billion.


4. (U) Unlike the large IPO's of 2005, which included larger players
such as Gol (airlines),Natura (natural cosmetics) and Lojas Renner
(retail),the 2006 generation of companies are smaller, with less
than Reals 150 million (US$71 million) in revenues per year. Maria
Helena Santana, superintendent of public relations for the BOVESPA,
told the press that "the major change since 2004 has been the size
of the companies seeking IPO." She cited the example of
Odontoprev, a company that offers dentistry health insurance and
dentistry services. When its IPO is completed, Odontoprev will be
the first health insurer to be listed on the stock exchange.
Odontoprev had Reals 147.8 million (US$70.3 million) in revenues in
2005, 23% growth from 2004. Profits were Reals 12 million and Reals
17.7 million in 2004 and 2005, respectively.


5. (U) BOVESPA has identified a trend of smaller companies seeking
the capital market. In order to help these small companies, BOVESPA
has created and established a special stock market segment to
satisfy their needs: called the new market ("Novo Mercado") listing
on which requires higher standards of corporate governance. These
standards include enhanced protections for minority shareholders
(all shares must be voting shares) and increased transparency,
including compliance with GAAP. To date only 20 companies, mostly
small ones, have listed on the Novo Mercado.


BRASILIA 00000835 002 OF 002


Telemar moving to the BOVESPA New Market
--------------


6. (SBU) Major fixed-line telephony service provider Telemar has
proposed a corporate restructuring. The proposal, draftedin part by
financial advisors Rothschild and UBS Warburg, is meant to increase
share valuations. To do so, Telemar would move its BOVESPA listing
to the Novo Mercado in a bid to improve its transparency and the
market's perception of its corporate governance. Controlling
shareholdings will be diluted and all non-voting (preferred) stock
will be converted to common shares. Currently Telemar is owned by
TNL (Tele Norte Leste),a holding company controlled by Tmar
Participacoes with 53.8% of the stocks, which in turn is controlled
by Group La Fonte, GP Invesments, BNDES (the Brazilian National
Development Bank) and the construction firm Andrade Gutierrez. The
restructuring plan envisions the creation of a new holding company -
OI Participacoes - which in addition to the BOVESPA Novo Mercado,
will also be listed on the New York Stock Exchange. Currently,
Telemar's stock valuation (ratio of market value to earnings) is
about 3.7. The company hopes to boost that substantially through
increased transparency. Telemar would be the largest company to
list on the Novo Mercado.

Big Changes
--------------


7. (SBU) According to a study by the consulting firm McKinsey, the
Brazilian capital markets, viewed broadly, are in the beginning
phase of an important transformation. Based on data from 1993 to
2004, the study found that the capital markets (including bond
markets) primarily have been serving government financing needs.
That is now changing, according to the report, as consensus has been
growing about the need to reduce the government financing needs (as
a percentage of GDP),thus freeing capital for private enterprises
and redirecting national savings.


8. (SBU) Comment: By comparison with the large splashy
privatization deals of the 1990s, which saw large parastatals float
a portion of their ownership through the stock market, the recent
IPOs initially appear puny. They nevertheless are indicative of a
healthy and growing trend: smaller Brazilian companies now have
greater access to non-bank sources of financing. Over time, this
could become a significant change.

CHICOLA