Brazilian bankers’ year-long carnival comes cheap

By Rob Cox
July 3, 2010

Brazil promises a yearlong carnival for investment bankers. The planned sale of some $82 billion of stock by oil giant Petrobras could make or break the global underwriting rankings banks use to hawk their services. But the honor won’t include a big payday.

Chalk it up to two major factors. First, the companies spearheading the whopper deals are controlled by the Brazilian government. And with elections in October, the Brasilia bureaucrats are being understandably frugal. State-owned Banco do Brasil’s sale of 9.8 billion reais ($5.4 billion) of new and existing shares on Wednesday is a case in point.

The deal’s underwriters walk away with a fee of just 0.5 percent of the total offering. It may be a long way from the meager 10 basis points underwriters earned for the Telebras privatization in the late 1990s. But it’s still low by today’s Wall Street standards, and represents about a quarter of the fees in previous offerings for private banks in Brazil. Moreover, the $27 million will have to feed many mouths.

In addition to Banco do Brasil’s BB Banco de Investimento securities arm, local broker BTG Pactual and the local divisions of Bank of America Merrill Lynch, Citigroup and JPMorgan underwrote the offer. Divvy up the spoils, and they’re less than $6 million each — not chump change, but hardly enough to keep dealmakers in the helicopters needed to evade Sao Paulo traffic jams.

This reflects the tough competition. Elbows are sharpening, as the country’s big local institutions, including Bradesco, Itau and Santander, square off with Wall Street and European investment banks.

Moreover, the willingness to accept such relatively low compensation for normally pricier labors sets a precedent. The next big issuance will be of Petrobras stock to finance a purchase of offshore oil reserves from the government and to fund a gap in its capital expenditure plans.

While underwriters are only likely to receive fees for the portion of the deal sold to minority shareholders, this could still be some $50 billion — along with the accompanying league-table credit.

The Petrobras fees don’t appear finalized yet. And other firms are expected to flank the leads. But with the prestige of being one of the top underwriters in the world, the government can practically name its price — and it won’t be a big one.

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