Alpargatas recently announced a primary offering of 37.5 million common shares and 57.5 million preferred shares to raise funds to finance the acquisition of a stake in Rothy’s, an American clothing and footwear manufacturer . which uses recycled products as raw material.
This move by Alpargatas, which has been publicly traded on the stock exchange since 1913 – it is one of the oldest shares listed on the Brazilian stock exchange – is called a follow-on.
When a company decides to go public on the stock exchange and makes its first public offering of shares, this operation is called an IPO, from the English Initial Public Offer. This only happens once. But when the company decides to offer more shares, at any time after the IPO, these new offerings are called subsequent (follow-on) – and this movement can happen several times.
Ways to follow up
The Brazilian stock exchange B3 reports that there are two ways for a publicly traded company to carry out a follow-on:
- According to CVM Instruction 400, the offering of shares is intended for the general public – for any investor, including retail investors, therefore. Therefore, ample, transparent and adequate disclosure of information about the offer, the shares offered, the company and other parties involved is required. According to B3, such public offerings must be previously submitted for registration with the Securities and Exchange Commission (CVM) and B3.
- According to CVM Instruction 476, the offering of shares is intended exclusively for professional investors, and thus can be distributed with restricted efforts. Additionally, says B3, the offer with restricted efforts is exempt from registration with the CVM and there is no obligation to prepare a prospectus. Regarding the local sales effort of these shares, B3 informs that they can be offered to a maximum of 75 professional investors; and acquired by a maximum of 50 of these investors, with no limit on the number in the case of foreign investors.
There are several reasons why companies make a subsequent share offering. In the case mentioned at the beginning of this text, Alpargatas, the company needed financial resources to acquire the American company. Buying another company is just one reason to follow-on. Other examples are:
- Financing the expansion of a manufacturing facility
- expand geographically
- Review the capital structure, balancing the level of indebtedness
types of follow-on
In addition, subsequent share offerings may have different characteristics.
The primary offering involves the sale of new shares issued by the company. In these operations, the money raised from sales goes to the company’s cash, increasing the capital stock and its shareholding base. When it comes to a secondary offering, the shares offered to the market belong to one or more shareholders, with the objective of reducing their participation in that company. In this case, these are relevant sales volumes and the money raised goes directly to the shareholder responsible for the sale.
What is the follow-on process like?
Carrying out the follow-on requires a careful assessment of the business. In addition to having to register the offering with the CVM and B3 (as indicated above), financial institutions join the operation to coordinate the process and distribute the shares on the market. In the example of Alpargatas, the controlling shareholders Itaúsa and Grupo MS committed to participate in the operation, while Itaú BBA, Bank of America, JPMorgan, Bradesco BBI and Citi are the coordinators.
From this, the size of the offer (number of shares) and the pricing of the shares are defined. This content should be in the final draft prospectus, one of the most important documents in a follow-on. It contains the main information about the company and the offer, and is used by investors to make a decision. There are also market perspectives, financial projections, risks, among other information.
Recent follow-ons carried out in Brazil
The follow-on operation is common in the stock market. See some recent examples:
BrasilAgro: raised R$440 million in February 2021 for the acquisition of assets in Bolivia, acquisition of land for exploration and development of agricultural properties, and business to optimize and leverage the company’s operational activities.
BRF: raised BRL 5.4 billion in February 2022, raising its share capital to around BRL 13 billion .
BTG Pactual: raised BRL 2.57 billion in June 2021 to accelerate strategic initiatives and the growth of the digital retail business area.
Light: raised BRL 2.7 billion in January 2021 with secondary shares belonging to Cemig.
Locaweb: raised BRL 2.977 billion in February 2021 to pay for acquisitions made and potential new business.
Magalu: raised BRL 3.981 billion in July 2021 for logistics expansion, including automation and new distribution centers and cross dockings, as well as investments in technology, innovation, research and development and strategic acquisitions.
PetroRio: raised BRL 2.049 billion in January 2021 to bring forward the organic investment schedule and financially support new acquisitions.
