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### Viewing cable 07SAOPAULO899, BRAZILIAN STOCK EXCHANGE IPO LARGEST IN HISTORY

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
07SAOPAULO899 | 2007-11-08 09:38 | 2011-07-11 00:00 | UNCLASSIFIED | Consulate Sao Paulo

`

    VZCZCXRO1247
    PP RUEHRG
    DE RUEHSO #0899/01 3120938
    ZNR UUUUU ZZH
    P 080938Z NOV 07
    FM AMCONSUL SAO PAULO
    TO RUEHC/SECSTATE WASHDC PRIORITY 7658
    INFO RUEHBR/AMEMBASSY BRASILIA 8771
    RUEHRG/AMCONSUL RECIFE 3867
    RUEHRI/AMCONSUL RIO DE JANEIRO 8425
    RUEHBU/AMEMBASSY BUENOS AIRES 2927
    RUEHAC/AMEMBASSY ASUNCION 3163
    RUEHME/AMEMBASSY MEXICO 0821
    RUEHMN/AMEMBASSY MONTEVIDEO 2488
    RUEHSG/AMEMBASSY SANTIAGO 2189
    RUEHLP/AMEMBASSY LA PAZ 3547
    RUCPDOC/USDOC WASHDC 2940
    RUEATRS/DEPT OF TREASURY WASHDC
    RHEHNSC/NSC WASHDC
    RUEHC/DEPT OF LABOR WASHDC
    RUEHRC/USDA FAS WASHDC 0706

` `

    UNCLAS SECTION 01 OF 03 SAO PAULO 000899

    SIPDIS

    SIPDIS

    STATE FOR WHA/BSC, WHA/EPSC, EEB/IFD/OIA
    STATE PASS USTR FOR KATE DUCKWORTH
    STATE PASS FED BOARD OF GOVERNORS FOR ROBITAILLE
    STATE PASS EXIMBANK
    STATE PASS OPIC FOR DEMROSE, NRIVERA, CMERVENNE
    NSC FOR TOMASULO
    TREASURY FOR JHOEK
    USDOC FOR 4332/ITA/MAC/WH/OLAC
    USDOC ALSO FOR 3134/USFCS

    E.O. 12958: N/A
    TAGS: EFIN EINV ECON BR
    SUBJECT: BRAZILIAN STOCK EXCHANGE IPO LARGEST IN HISTORY

    REF: 06 SAO PAULO 970

    Summary
    -------
    ¶1.  (U) The Brazilian Stock Exchange's (Bovespa) initial public
    offering (IPO) last month was the largest in Brazil's history,
    bringing in nearly USD 4 billion.  Bovespa representatives told
    Econoff that its IPO raised its international profile and increased
    its worldwide credibility as a premier exchange.  Bovespa spent more
    than a year restructuring the company in preparation for what became
    Brazil's 56th IPO in 2007.  Bovespa's IPO was considered a secondary
    IPO, meaning that the company didn't raise any new financing;
    Bovespa's existing shareholders sold their shares to new buyers in a
    public marketplace.  The larger purpose of initial public offerings
    in Brazil is to help improve corporate governance and disclosure.
    Brazilian media are widely speculating that Brazil's Futures and
    Commodities Exchange (BM&F) will be the next big IPO later this year
    or early in 2008.  Although the trend of IPOs in Brazil is generally
    positive, some of Brazil's IPOs do not meet minimum U.S. investment
    standards.  End Summary.

    Bovespa Largest Brazilian IPO in History
    ----------------------------------------
    ¶2.  (U) On October 26, Brazil's stock exchange, the Bovespa, became
    a publicly traded company by inaugurating itself as the 56th
    Brazilian initial public offering (IPO) this year and the exchange's
    largest IPO in its history.  Bovespa is the largest equity market in
    Latin America and the 5th largest in the world based on market
    capitalization, worth about USD 14 billion, and behind only the
    Chicago, Hong Kong, Frankfurt, and New York (NYSE) exchanges.  The
    IPO was successful by all accounts, with a high subscription rate
    and a 52 percent price appreciation from its pre-offer level.  In
    total, Bovespa's IPO garnered USD 3.75 billion, about USD 1 billion
    more than Redecard, a Brazilian financial services company, in its
    IPO earlier this year.

    ¶3.  (U) Press reports said that the demand for Bovespa's stock
    spurred the largest trading volume registered to date, about half
    for Bovespa's stock.  Foreign investors purchased 80 percent of the
    initial offering, and Bovespa's Listing and Issuers Development
    Manager Wang Jiang Horng told Econoff that about half of the
    exchange's daily foreign participation is by U.S. investors.

    ¶4.  (U) Bovespa barred investors who had participated in Brazilian
    IPOs between August and October and had sold 20 percent or more of
    their shares on the first day of trading from participating in this
    offering.  This represents a new effort to prevent speculators from
    driving down the opening day share price.  Press reports indicated
    the Brazilian securities exchange commission, Comissao de Valores
    Mobiliarios (CVM), ruled the decision within the bounds of capital
    market regulations and said that it could become an operating
    standard.

    ¶5.  (U) Company representatives told Econoff that Bovespa views its
    IPO as a key strategic step toward becoming a premier exchange; the
    IPO raised its international profile, strengthened its investor
    base, and elevated corporate governance standards and transparency
    in Brazil.  The IPO also opens the door to international
    partnerships and facilitates Bovespa's capacity to raise future
    capital.

    Part of a Larger Trend in IPOs
    ------------------------------
    ¶6.  (U) Bovespa's Horng told Econoff that her team has been
    overwhelmed with applications for Brazilian IPOs this year.
    Bovespa's IPO was the 56th this year, and CVM has another 31
    currently under review.  Last year there were 26 IPOs, and nine and
    seven in 2005 and 2004, respectively, but only six between 1995 and

    SAO PAULO 00000899  002 OF 003

    ¶2004.  Before 2002, investors were uninterested in Brazilian IPOs
    because of structural barriers and a lack of confidence in the
    Brazilian stock market.  However, in 2000 Bovespa introduced the
    Novo Mercado (New Market), Brazil's newest exchange tier with the
    most stringent corporate governance requirements, to encourage
    investment (reftel).

    ¶7.  (U) To "go public", traditionally private family companies in
    Brazil must undergo drastic changes, including bringing in new
    management and investors, and developing the legal and accounting
    frameworks necessary to apply to the CVM and Bovespa for
    consideration.  Bovespa Holding, for example, spent a year and a
    half preparing for its IPO.  Horng told Econoff that the CVM and
    Bovespa have 30 days to provide comments and mandatory
    recommendations on a company's initial IPO application.  After that
    companies have five days to comply with their recommendations.  From
    there, a company goes on a "road show" to market itself to investors
    worldwide for another two to three weeks.

    Brazilian Market Differences
    ----------------------------
    ¶8.  (U) Brazilian IPOs can be primary or secondary market offerings.
     Primary offerings are similar to IPOs in the U.S., however, in
    secondary offerings, including Bovespa's own IPO, no new net
    financing is raised because no new shares are sold.  Existing
    shareholders profit from the IPO by selling to new buyers, while the
    company itself does not profit from the offering.

    Pushing Corporate Governance
    ----------------------------
    ¶9.  (U) The growth in IPOs has encouraged better corporate
    governance within Brazil's financial market, as investors push
    companies by considering corporate governance in their company
    valuations.  As part of a broader effort by Brazilian authorities to
    professionalize the exchange, companies pursuing IPOs are required
    to justify to CVM and Bovespa when they choose not to list under the
    tougher Novo Mercado standards.  The Novo Mercado has been the main
    driver for improving Bovespa's credibility, and 70 percent of IPOs
    in 2007 have listed on the Novo Mercado.  (Note: Of Bovespa's four
    exchange tiers, three have disclosure standards.  End Note.)

    ¶10.  (U) Brazilian pension funds are increasing their exposure to
    equity, which should increase Bovespa's yearly volume by USD 10 to
    13 billion over the next three years.  Bovespa is developing Bovespa
    Mais, a new market segment that will bring small and medium firms to
    market.  (Note: "Mais" means "more" in Portuguese.  Ninety percent
    of Brazilian companies are small or medium enterprises based on
    sales revenues.  End Note.)  Bovespa first launched the idea more
    than a year ago, but has been awaiting CVM regulatory approval.

    ¶11.  (U) Market insiders expect the next high-profile IPO to be
    Brazil's Futures and Commodities Exchange (BM&F).  Earlier this
    month, the Chicago Mercantile Exchange Group (CME) signed a letter
    of intent to purchase 10 percent of BM&F's stock in exchange for two
    percent of CME.

    Comment
    -------
    ¶12.  (U) Bovespa's IPO was hugely successful and should be viewed as
    signal of the sustained interest in Brazilian financial assets.
    Brazilian IPOs have generally high subscription rates and
    international financial markets appear to welcome the continued
    trend.  IPOs are helping reduce the concentration of family-owned
    companies in Brazil, but should be evaluated with caution, as the
    lower market tiers do not meet U.S. disclosure requirements.  End
    Comment.

    ¶13.  (U) This cable has been cleared by Embassy Brasilia.

    SAO PAULO 00000899  003 OF 003

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