How to go public and private all in one go

March 28, 2013

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

A Brazilian company seems to have found a way to go public and private all in one go. Biosev, an ethanol producer, is preparing to sell new shares next month. As part of the deal, parent company Louis Dreyfus is offering to buy them back in 15 months. It’s essentially an initial public offering, convertible bond and potential buyout packaged together. And it’s an overly clever solution to a unique problem.

Under an existing agreement with minority holders, Biosev needs to launch an IPO before autumn next year. The company needs the capital, too. Unfortunately, the Brazilian capital markets have not been cooperative. The company had to pull an earlier attempt to float last year. This time round, the mood hardly seems better: the main stock index is down almost 10 percent.

Enter some clever financial engineering. Dreyfus is offering puts to buyers of the stock, allowing them to sell the shares back to Dreyfus for the offer price plus interest. That essentially turns the stock into a convertible bond, with upside potential and protection against losses. That could encourage buyers to take a punt on the stock at 15 reais a share, which would raise about $350 million – more if supplementary stock is issued. Moreover, the puts act to bump up the indicated price of the offering to ensure the shares aren’t priced at a discount to an earlier rights issue.

If Biosev’s prospects are bright, and the market irrationally skeptical, Dreyfus is selling insurance that won’t be needed. But it’s a calculated risk. The private commodities firm is hungry for cash – it is spending $7 billion over the next four years on expansion to keep up with rivals. Should the company’s prospects dim, the Brazilian market take a tumble or unexpected sugarcane blight occur, Dreyfus could be on the hook to buy back the stock.

Complex financial engineering may have solved the problem of how to float the company without disappointing anyone. It hasn’t eliminated risk, but merely moved it around among buyers and Dreyfus. A simple float at a lower price might be a better, more transparent way to raise capital.

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This offering will be very appealing to investors who are looking to preserve principal but would also like a shot at the upside.

Terry Stidham
Target Search Group

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