Money-Back Option in Use as Dreyfus Unit Sinks: Corporate Brazil

Jul 17, 2014 4:44 pm ET

July 17 (Bloomberg) -- Biosev SA gave a money-back guarantee as part of its initial public offering 15 months ago after a first attempt to sell the shares collapsed. Now, investors are lining up to collect.

Investors who bought stock in the Brazilian sugar and ethanol producer for 15 reais in April 2013 also had a chance to purchase a put option that allowed them to recoup their money, plus interest, if the stock dropped. The 80 percent of investors who bought puts can now sell the shares back for 16.57 reais, or more than double yesterday’s closing price.

Biosev has slumped 50 percent since the IPO as the company posted a third year of losses. While investors will turn in shares worth about 620 million reais ($278.8 million) on July 21 when the put expires, the company’s balance sheet won’t be affected. The shares will be bought back by a separate company created by Biosev controller Louis Dreyfus Commodities BV to manage the put option.

Biosev “has been doing poorly, so the stock fell,” Saulo Sabba, a partner at financial advisory firm Faros Investimentos, said by phone from Rio de Janeiro. “The put has also created some noise. After the expiration, the stock price will be linked to their domestic operations and results, without any distractions.”

Biosev and Amsterdam-based Dreyfus declined to comment on the put option when contacted by e-mail, as did Banco BTG Pactual SA, which managed the IPO. The put option is the responsibility of the controlling shareholder, not Biosev, Chief Executive Officer Rui Chammas said in a June 16 interview.

IPO Revival

Brazil’s second-biggest sugar-cane processor revived its IPO less than a year after a first attempt failed, with Dreyfus buying 12 percent of the deal. The shares sank 14 percent on their debut, which was the biggest first-day drop in the country’s stock market since 2008.

The value of options contracts that Biosev gave investors as a money-back guarantee in the IPO has soared 37 times to 9.30 reais.

Biosev shares have tumbled 23 percent this year through yesterday, compared with an 8.2 percent gain for the Ibovespa. The benchmark gauge for Brazilian equities dropped 0.1 percent at the close in Sao Paulo.

Brazilian sugar millers, which produce almost half of the world’s exports, faced cash shortages after expanding and producing too much sugar. Ethanol exports from Brazil, the world’s largest shipper, are expected to drop to the lowest in 11 years as the U.S. plans to cut biofuel mandates, an official at Biosev said on April 28.

Business Plans

The Sao Paulo-based company reported losses of 725 million reais in the fiscal year ended in March. Biosev suspended operations in one of its units and slashed 20 percent of its executive jobs this year as it reviewed its business plans. Competitor Aralco SA Acucar & Alcool defaulted on $250 million of bonds in March.

“The sector still has an oversupply,” Pedro Henrique de Souza Bruno, an analyst at hedge fund Fides Asset Management, said by phone from Rio de Janeiro. “However, sugar prices have improved, and should have a better supply/demand balance in a couple of years.”

Sugar prices have climbed 4 percent in 2014 after plunging almost 50 percent over the previous three years, outpacing a 0.3 percent drop in the Standard & Poor’s GSCI gauge of 24 commodities.

As the industry recovers and the “noise” related to Biosev’s put expiration fades, the stock should rebound, according to Auro Rozenbaum, an analyst at the investment banking unit of Banco Bradesco SA.

‘Doing Better’

“The sector has been going through a series of problems, but it’s doing better now,” Rozenbaum said by phone from Sao Paulo. “Biosev has been restructuring and it already took several steps for that. The company’s outlook is good and the stock is cheap.”

Rozenbaum has a recommendation equivalent to hold on the shares, with a price estimate of 13.20 reais, 75 percent above the current level.

After the put exercise, the amount of Biosev’s shares available for trading will drop below the 25 percent required for the Novo Mercado segment in which Biosev is listed. While some of the stock will be sold back to boost the free float back to the required limit, liquidity on the shares will drop further, according to Sabba.

“With the controller holding all of those shares, the situation will be even worse,” he said.

--With assistance from Jessica Brice, Ney Hayashi and Denyse Godoy in Sao Paulo, Gerson Freitas Jr. in São Paulo and Lucia Kassai in Houston.