Bloomberg News

Redecard Shorting Surge Shows Traders Bet Itau Bid to Fail

May 17, 2012

Traders are stepping up wagers that Itau Unibanco Holding SA (ITUB4) will fail in its effort to buy out minority holders of Redecard SA (RDCD3), Brazil’s second-biggest card- payment processor.

The amount of borrowed Redecard shares, an indication of short selling, totaled 32 million yesterday, up from 6 million shares on April 27, when the company said investor Lazard Asset Management LLC requested a new appraisal of Itau’s bid for the 50 percent of the equity it doesn’t own. Short selling allows traders to profit from drops by selling stock and buying it later at a lower price.

“The short-selling indicates there is a bet the purchase won’t happen and the shares will fall,” Paulo Ribeiro, an analyst at HSBC Securities, said by phone from Sao Paulo.

Itau, Latin America’s biggest bank by market value, offered 11.8 billion reais ($5.9 billion), or 35 reais a share, on Feb. 7 to take full ownership of Redecard and delist it less than five years after going public. NM Rothschild & Sons Ltda., the first investment bank hired to determine the value, said shares were worth as little as 34.18 reais. Lazard, Redecard’s second- biggest investor with a 10 percent stake, said Rothschild undervalued Redecard and shareholders will vote tomorrow on its proposal to seek a second assessment.

Lazard Proposal

Redecard fell 1.7 percent to 32.10 reais in Sao Paulo today, lower than Itau’s Feb. 7 bid and also below the stock’s high this year of 36.40 reais, reached on Feb. 8. The Barueri- based company has gained 10 percent this year, compared to a 41 percent advance for bigger rival Cielo SA. (CIEL3)

Borrowed shares in Redecard represented 4.8 percent of stock outstanding yesterday, up from less than 1 percent on April 27, according to data compiled by Bloomberg and Brazil’s clearing and depository corporation. The stock outstanding includes shares held by Itau. Investors in Brazil borrow stock to use for short-selling, hedging and tax purposes.

Investors who borrowed shares are also allowed to vote tomorrow as if they owned the stock, Mauro Cunha, president of Brazil’s minority-shareholders association, said in a telephone interview today.

Lazard’s proposal would require the company to hire Credit Suisse AG to make a new appraisal of the shares’ fair value if approved by Redecard’s minority shareholders tomorrow.

Lazard said in an April statement that the Rothschild evaluation used “conservative” forecasts for sales and costs, and a more accurate appraisal would take into account premiums paid to shareholders in companies that have been acquired.

Value Estimates

Rothschild valued the stock at 34.18 reais to 37.59 reais based in a free-cash flow calculation, the bank said on April 5. It also said Redecard’s shares worth 36.13 reais to 37.11 reais using a methodology based on Cielo’s stock price.

“The short selling is related to what will be decided tomorrow in the shareholders meeting, whether the appraisal will be approved,” said Fausto Gouveia, who helps manage 380 million reais at Legan Administracao de Recursos in Sao Paulo. “After tomorrow’s meeting, things may get clearer about whether the old appraisal of 35 reais to 36 reais will prevail or there will be a new price.”

Lazard’s press office declined to comment. Itau’s press office didn’t return a call seeking comment. Redecard’s press office declined to comment. The Rothschild office in Sao Paulo declined to comment.

Short Squeeze

The increase in borrowed shares may reflect a move by a large investor to create a short squeeze should the stock rise, Luis Gustavo Pereira, a strategist at Futuro Corretora in Sao Paulo, said in a telephone interview today. Traders holding short futures positions get “squeezed” when prices rise rapidly, forcing them to pay a premium to maintain their position or liquidate and cover their contracts.

“If the bid goes ahead, Redecard may reach 35 reais,” he said. “The market is borrowing everything before the event.”

Itau said in an April 30 filing that it has no intention of raising its bid regardless of a second appraisal. The Sao Paulo- based lender also said it may give up its buyout plans if the transaction can’t be completed in a timely manner.

“If the bid fails, Itau may seek to renegotiate the prices of some services it provides Redecard,” said Ribeiro, who estimates the shares are worth 39 reais each and recommends investors buy the stock. “Itau would probably impose new fees on Redecard, and the market may punish the shares.”

Novo Mercado

Itau had also warned that it may delist Redecard from Bovespa’s Novo Mercado if shareholders didn’t accept the 35 reais bid. Itau said April 16 it would no longer pursue that course of action after Brazil’s minority-shareholders association said such a move would require approval by two- thirds of holders.

Two-thirds of Redecard’s shareholders also must approve Itau’s bid for it to go through. No date has been set for a vote.

Redecard and its shareholders raised 4.07 billion reais in its initial public offering in July 2007, Brazil’s biggest share sale in five years at that time. The shares were priced at 27 reais each.

To contact the reporter on this story: Francisco Marcelino in Sao Paulo at mdeoliveira@bloomberg.net; Denyse Godoy in Sao Paulo at dgodoy2@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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