Brazil · Markets

A deal announced as a 15 percent premium is now worth barely more than the market price, and the offer document says so itself.

If you hold Santander Brasil units, the Santander Brasil share swap is no longer the deal that was announced in July. The exchange ratio has not moved. The share prices have, and they have moved in a direction that leaves very little on the table for anyone thinking of accepting.

The Altino Arantes building, now Farol Santander, was built for Banespa — the São Paulo state bank Santander bought in 2000. File photograph. (Photo: Wilfredor / Wikimedia Commons, CC BY-SA 4.0)

What was filed on Monday

Banco Santander, the Spanish parent, filed a Form F-4 registration statement with the US Securities and Exchange Commission on 21 September. It is marked subject to completion and has not been declared effective. On the same day Santander Brasil disclosed that requests had gone to Brazil’s securities regulator, the CVM, and to the exchange, B3, covering four things.

There are four requests. Register the Spanish parent as a foreign issuer in Category A. Register a BDR programme. Admit those BDRs to trading on B3. And register the Brazilian offer itself. A BDR, or Brazilian Depositary Receipt, is a certificate traded in São Paulo and backed by a share held abroad. Here each one represents a single new Santander share. Holders are not shareholders of the parent directly, and depend on a Brazilian depositary bank to pass on dividends and voting instructions.

Asking is not the same as getting, and none of these registrations has been granted. Santander’s own document says it expects to obtain them before the offer starts. Until then there is no offer to accept and no deadline to miss.

Why the Santander Brasil share swap looks different now

The terms were set on 30 July, using that day’s closing prices. Santander shares closed at 12.248 euros (about US$14.06 at that day’s rate). Santander Brasil units closed at R$25.25 (about US$4.97). The ratio of 0.4056 parent shares per unit implied R$29.04 (about US$5.72), which is the 15 percent premium everybody reported.

Then the Brazilian shares went up. By 15 September the units were at R$30.07 (about US$5.84), while the parent rose only 3.4 percent to 12.67 euros (about US$14.62). On those prices the premium is about 1.6 percent on units, 1.4 percent on common shares and 1.2 percent on the New York receipts. The offer document publishes these numbers itself, and converts reais at a rate of 5.1487 to the US dollar for 15 September.

It also concedes two more. Measured over the twelve months to 30 July, the offer is a 3.6 percent discount to the average unit price. Against the high in that period it is a 22.6 percent discount. JPMorgan noted that the comparable 2014 deal carried an initial 20 percent premium.

The timing question analysts raised

The reference date was the day after Santander Brasil reported a weak second quarter. Recurring profit came in at R$3.0 billion (about US$583 million), down 17.6 percent on the year, and the units fell 7.37 percent on the news. The premium was then struck against that lower price.

JPMorgan called the proposal disappointing next to 2014. Citi measured it against the pre-results price and put the effective premium near 5 percent. BTG Pactual said the timing clearly favours the Spanish parent, which is paying with its own richly valued shares. Safra described it as a soft anchor rather than the firm floor a cash offer would provide.

There is a detail on the valuation too. UBS BB, a brokerage owned by UBS and Banco do Brasil, cut its rating on the units in late August, then in September was engaged by Santander as the independent appraiser and delivered its report on 18 September. The prospectus states plainly that the appraiser’s duties are owed to Santander alone and that the report is not a fairness opinion.

What happens if you do nothing

The offer is not a going-private, whatever the shorthand suggests. Santander’s own release says it does not seek a delisting, and the prospectus confirms that the shares and units carry on trading on B3 in the traditional segment after completion.

More to the point, holders who refuse cannot be forced out. Because the registration as a listed company is not being cancelled, the parent has no right to a squeeze-out or a compulsory redemption. There are no appraisal rights either — Brazilian law does not attach them to a voluntary tender offer.

What does exist is a second bite. Less than 15 percent of the shares will sit in unrelated hands after the auction. That triggers a rule giving every holder who did not tender 30 calendar days to exchange with Santander on the same terms. It is not automatic: Brazilian holders must give written notice and sign the agreement at a branch in person or through an attorney. And the ratio is not adjusted for the Selic, Brazil’s benchmark interest rate, in the meantime, because the consideration is shares rather than cash.

Why this matters beyond the shareholder register

The parent already owns about 89.7 percent of the capital. The free float is roughly 10.3 percent, worth somewhere around R$11.5 billion (about US$2.2 billion) against a market value of R$111.4 billion (about US$21.6 billion). So the money involved is modest next to what the deal does to liquidity.

Santander Brasil trades about R$130 million (about US$25 million) a day, on a 30-day average. Itaú trades R$1,089 million (about US$211 million). HSBC cut the stock to hold in mid-September precisely on that point, expecting liquidity to fall to minimum levels, and put its target at R$31 (about US$6.02).

For anyone saving or investing in Brazil, that is the real consequence. A bank with 76.2 million customers and about 47,300 staff at the end of June becomes progressively harder to own as a Brazilian asset. Accepting swaps a bank geared to Brazilian interest rates for euro exposure to a global parent. Refusing keeps the Brazilian exposure, but in a market with fewer buyers on the other side when you want out. Neither choice is clearly right, and the shrinking premium is what makes it a choice at all rather than a windfall.

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