IPO Preview: Votorantim Cimentos S.A. Postponed, Totally Mispriced

Jun.20.13 | About: Votorantim Cimentos (VEBM)

Update: On June 18th, VEBM's $3.4 billion IPO was postponed. It was totally mispriced and there were significant accounting errors in the SEC filing. How could the 'investment bankers' make such errors? See our pre-IPO comments below.

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Based in São Paulo, SP, BR, Votorantim Cimentos S.A. (VEBM) scheduled a $3.4 billion IPO with a market capitalization of $53.7 billion at a price range mid-point of $17.05 per ADR, for Thursday, June 20, 2013.

Four other new IPOs are scheduled for the week of June 17th. The full IPO calendar is here.

  • F-1A filed May 31, 2013
  • Manager, Joint Managers: Morgan; J.P. Morgan; Itaú BBA; Credit Suisse; BTG Pactual
  • Co-Managers: HSBC; Goldman; Deutsche; Bradesco BBI; BofA Merrill; Banco do Brasil; Banco Votorantim

Summary

VEBM is a cement and building materials company with operations in North and South America, Europe, Africa and Asia.

Valuation

Valuation Ratios

IPO Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing March qtr

Cap (NYSE:MM)

Sls

Erngs

BkVlue

TanBV

in IPO

Votorantim Cimentos S.A.

$53,665

11

137.7

11.0

7.1

6%

P/E based on 2012*

65.8

*VEBM 2012 results include tax credits. VEBM paid no taxes in 2012.

Click to enlarge

Glossary:

Observations

Eleven times sales, 11 times book value, 138 times annualized Q1 earnings for a cement company?

Compared to both international and US cement and building materials companies, VEBM's price-to-sales, price-to-earnings (annualizing Q1 '13 results) and price-to-book values are much higher.

In addition, there appears to be an accounting mistake because price-to-tangible ratios are always the same as or higher the price-to-book value (see discussion below).

VEBM's numbers not consistent

According to the F-1A price-to-book value is 11 and price-to-tangible book value is 7.13. One of those numbers is not correct - because price-to-tangible book value is always the same as or higher than price-to-book value.

Book value, page 48 = (3) $4892 million
Price-to-book value = Capitalization / book value = $53.7 billion / $4.9 billion = 11

Tangible book value, page 49
Tangible book value: $17.05 = price range mid-point, $2.39 = adjusted tangible book value
Price-to-tangible book value = 17.05/2.39 = 7.13

Financial statements not comparable -- red flag

Because the 2012 Cimpor asset exchange was consummated on December 21, 2012, audited consolidated financial statements as of and for the years ended December 31, 2012, 2011 and 2010 include segment asset information for three operating segments but results of operations for only two segments: (1) Brazil (including operations in South America); and (2) North America.

Starting on January 1, 2013, financial statements include operating the results of the three operating segments described above.

Conclusion

The VEBM offering was totally mispriced, which is why they had to postpone the IPO. It certainly wasn't because of 'market conditions.'

Avoid the VEBM IPO based on comparative valuation metrics, and also based on the price-to-tangible book value mentioned above.

The units may be offered directly or in the form of American Depositary Shares, or ADSs, each of which represents two units. The ADSs will trade as American Depositary Receipts (ADRs).

The financials use an exchange rate of R$2.0527 per U.S.$1.00 reported by the Brazilian Central Bank on May 27, 2013.

To put the above conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced earlier:

Business

VEBM is a global vertically-integrated heavy building materials company, with operations in North and South America, Europe, Africa and Asia.

VEBM believes its is the largest and most profitable heavy building materials company in Brazil, the fourth-largest cement market in the world according to the Building Materials Research Report.

VEBM produce and sells building materials-which includes cement, aggregates, ready-mix concrete, mortar and other building materials.

VEBM is the eighth-largest global cement producer in terms of annual installed cement production capacity, according to the Global Cement Report.

We believe we are uniquely positioned to maintain high returns on capital and generate significant value for our shareholders.

Parent
Votorantim Industrial

VEBM is part of Votorantim Industrial (VID), a privately held conglomerate in Latin America that is a strong player in each of its main business segments: cement; non-ferrous metals, such as zinc, aluminum, nickel and copper; and pulp (through a company that Votorantim Industrial jointly controls), as well as significant steel and power generation operations. Votorantim Industrial had consolidated net revenues and Adjusted EBITDA in 2012 of U.S.$12,311 million U.S.$2,533 million, respectively.

Pre-IPO VID directly owns 100.0% of VEBM's capital stock. VID is a wholly owned subsidiary of VPar, which is controlled by the Ermirio de Moraes family.

Operations

VEBM has operations in what it believes are high-growth markets, with a total of 33 cement plants, 23 grinding mills, 331 ready-mix plants, 84 aggregates facilities, two clinker plants, two lime units and 13 mortar plants. In addition, VEBM has a total of 61 limestone quarries with an expected average reserve life in excess of 60 years assuming VEBM were to operate at maximum production capacity as of December 31, 2012.

Geographical areas

VEBM is organized by geographical areas with three operating segments based on the location of main assets, as follows: (1) Brazil (including operations in South America); (2) North America; and (3) Europe, Africa and Asia.

VEBM does not intend to continue operations in China, which VEBM acquired in December 2012 as part of the 2012 Cimpor asset exchange. VEBM has implemented a plan to dispose of the China business

Capitalization

(1) $17.05 = price range mid-point for the proposed ADR offering
(2) Page 9: "Immediately after this global offering, we will have 6,294,642,858 total shares issued and outstanding" which equates to 3.15 billion ADRs (each ADR = 2 shares)
Capitalization = $17.05 times 3.14bb shares = $53.7 billion

Dividend policy

VEBM intends to declare and pay dividends and/or interest on stockholders' equity in each year in amounts equivalent to a minimum of 25.0% of adjusted net income, in accordance with Brazilian corporate law and our bylaws. Based on 2012 results the annual dividend yield at 25% of profits would be a miniscule .4%.

Exchange listing

VEBM has applied to list its ADSs (traded as ADRs) on the New York Stock Exchange under the symbol "VEBM". VEBM has applied to list units and underlying common shares and preferred shares on the Level 2 (Nível 2) segment of the São Paulo Stock Exchange (BM&FBOVESPA S.A. - Bolsa de Valores Mercadorias e Futuros), or BM&FBOVESPA, under the symbols "VEBM11", "VEBM3" and "VEBM4", respectively.

Competition

In Brazil, major competitors are InterCement Brasil S.A. and Cimento Nassau (João Santos), and globally VEBM competes with local and international players, including Lafarge S.A., CEMEX S.A.B. de C.V., HeidelbergCement AG and Holcim Ltd.

U.S competition
U.S. segment competitors include Martin Marietta Materials, Inc. (NYSE:MLM); Texas Industries, Inc. (NYSE:TXI); Eagle Materials, Inc. (NYSE:EXP)

Use of proceeds

From 400,000 million units or 200 million ADR equivalents

The offering size is 200mm (ADR equivalents) times $17.05 = $3.4 billion

(NYSE:A) VEBM expects to net $2.365 billion (after offering expenses) from selling 286 million units or 143 million ADRs equivalents. $17.05 x 143mm = $2.365bb

(NYSE:B) Shareholders expect to receive 57 million times $17.05 = $972 million.

IPO proceeds are allocated as follows.
(1) U.S.$1,064.1 million (45% of proceeds) of the net proceeds to continue organic cement expansion strategy and diversification of the portfolio of products in Brazil, as well as for potential acquisitions of heavy building materials companies or assets outside Brazil,
(2) U.S.$945.9 million ( 40%) of the net proceeds to enhance the working capital position and
(3) U.S.$354.7 million (15%) of the net proceeds to further improve the efficiency of operations.

Early financial analysis available to subscribers.

Disclaimer: This VEBM IPO report is based on a reading and analysis of VEBM's F-1A filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.