Petrobras deal fees not as paltry as they appear
Brazil’s massive sale of about $79 billion of Petrobras stock looks set for a string of financial superlatives. One of them, however, won’t be loudly crowed about by investment bankers. The underwriting fee on the deal, which is expected to close this week, looks to be among the lowest yet in a global stock offering of this kind.
According to the Brazilian prospectus for the offering, Petrobras is paying just 0.21 percent of the total size of the offering to its coalition of bankers. To put that in context, even the increasingly indebted U.S. government is paying the underwriters in the planned sale of the state’s shares in General Motors a fee three-and-a-half times larger.
Of course, a relatively low gross underwriting spread was to be expected for an offering like the Petrobras deal. For starters, it’s just humungous by any standard. Inclusion on the deal will make or break this year’s league tables of the world’s biggest underwriters, which securities firms use to market their services.
Second, Petrobras is controlled by the government on the eve of elections. No minister wants to explain why millions of reals are flowing to Banco Bradesco, Bank of America, Morgan Stanley, Santander, Itau and Citigroup instead of the country’s favelas, or slums. And finally, fees in general are lower in Brazil, reflecting both the high competition among São Paulo’s banking community and the fact it’s still a poor country.
But poor is a relative concept when it comes to banking. Moreover, look closely at the Petrobras deal and it’s hard to feel much sympathy for Brazil’s bankers. While the deal does technically involve the sale of around $79 billion of Petrobras equity, $43 billion of that represents the transfer of stock to the government for 5 billion barrels of reserves.
So the underwriters are really only selling around $36 billion of new stock. That’s still a lot of phone calls to portfolio managers, rubber-chicken lunches with hedge funds and one-on-ones with Asian sovereign wealth funds. But strike out the government’s bit, and the more than $140 million they divvy up is closer to half a percent. Not bad for half a job.