VZCZCXRO8505
RR RUEHRG
DE RUEHBR #0835/01 1181539
ZNR UUUUU ZZH
R 281539Z APR 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5238
INFO RUEHRG/AMCONSUL RECIFE 4673
RUEHRI/AMCONSUL RIO DE JANEIRO 1963
RUEHSO/AMCONSUL SAO PAULO 6840
RUEHAC/AMEMBASSY ASUNCION 5383
RUEHBU/AMEMBASSY BUENOS AIRES 3968
RUEHMN/AMEMBASSY MONTEVIDEO 6202
RUEHSG/AMEMBASSY SANTIAGO 5459
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDO/USDOC WASHDC
RHEHNSC/NSC WASHDC

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