Brazil M&A hits five-year low on turmoil, state intervention

Tue Oct 2, 2012 11:24am EDT

* Credit Suisse, BTG top rankings in value, number of deals
    * Bankers see private equity jump-starting M&A deals

    By Guillermo Parra-Bernal
    SAO PAULO, Oct 2 (Reuters) - Concerns about growing state
intervention, a slowing economy and new antitrust rules have
driven merger and acquisition activity in Brazil to a five-year
low so far in 2012, but bankers are confident a recovery is just
around the corner.
    Companies announced $53.99 billion worth of deals in Brazil
between January and September, down 10 percent from a year
earlier, according to a quarterly Thomson Reuters report on M&A
activity. That's the lowest total since $35 billion in M&A deals
were announced in the same period of 2007.
    The downturn in M&A activity is worldwide. Europe's debt
crisis and an economic slowdown in China have investors and
dealmakers retrenching around the globe. In Brazil, a growing
government presence in the economy has clouded the outlook even
further.
    In recent months, President Dilma Rousseff has steadily put
pressure on banks, telecommunications companies and power
utilities to lower rates for consumers, creating uncertainty
about potential financial returns in those industries.
    "Greater market volatility and a more active government
stance in some sectors have made it harder for bids and offers
to converge," said Renato Ejnisman, managing director for
investment banking at Bradesco BBI, the investment banking arm
of Brazil's No. 2 private sector bank, Banco Bradesco
.
    The situation underscores some of the policy risks in Latin
America's largest country as Rousseff uses regulatory powers in
a bid to strong-arm companies to invest more. Capital spending
as a percentage of gross domestic product has fallen this year
to the lowest level in almost two years, a trend the Rousseff
administration is scrambling to reverse.
    The introduction of changes to antitrust laws in June
probably made companies and banks more cautious in the third
quarter, Ejnisman said. Still, concerns about an increasingly
activist government are unlikely to stop foreign companies from
investing in Brazil altogether, bankers said.
    Under the new rules, antitrust agency Cade has no more than
330 days to review a proposed merger. Companies and advisers may
be trying to gauge how quickly Cade will act, but so far the
agency is approving deals faster than expected.
    Concern that Cade will drag its feet "is simply overdone,"
said Daniel Wainstein, chairman of Goldman Sachs Group's 
Brazilian investment bank. "We have witnessed a rather good pace
of approval so far since the implementation of the new rules."
        
    RECOVERY UNDER WAY
    While the value of M&A activity in Brazil is down this year,
the number of deals actually rose by 38 to 596 in the
January-September period, the Thomson Reuters report showed.
That, bankers say, suggests a recovery is under way.
    Foreign and local banks are betting on M&A advisory work as
a stable revenue source in Brazil regardless of how fees behave,
said José Olympio Pereira, chief executive of Credit Suisse
Group's Brazilian unit. Fees in Brazil will likely
amount to less than the estimated $800 million in fee income
last year, bankers say.
    Staff and capital levels are widely seen as adequate,
meaning that any recovery is unlikely to lead firms to hire
massively or deploy additional resources or money into
operations, bankers added.
    "There is a lot of competition, but there's also a lot of
work to do," said Pereira, whose bank tops the M&A rankings in
Brazil this year. Deals handled by Credit Suisse include Lenovo
Group's takeover of Brazilian electronics maker CCE.
    During the third quarter, Credit Suisse overtook Itau BBA,
the investment banking unit of banking giant Itau Unibanco
Holding, as Brazil's top M&A advisory firm.
    Credit Suisse advised on $19.31 billion worth of M&A
transactions through September, followed by Itau BBA's $19.11
billion, the Thomson Reuters rankings showed.
    BTG Pactual, the Brazilian investment bank owned
by billionaire financier André Esteves, topped the ranking in
number of deals advised with 64, followed by Itau BBA's 51. 
    Unlike counterparts in other emerging markets such as China,
Brazilian banks have consistently bested their foreign rivals
over the past two years at funding deals, forging stronger
client ties and setting up distribution networks similar to
those of global banks. 
    Four local banks were among the Top 10 rankings for the
fifth straight quarter, the report showed. One of them, BR
Partners, which ranked 10th, is an advisory-only shop.
    
    INFRASTRUCTURE COMES TO THE RESCUE
    Still, foreign banks such as JPMorgan Chase & Co and
Citigroup Inc gained ground in the rankings, mainly
because of their role advising private equity and sovereign
wealth funds on Brazilian deals. JPMorgan, for instance, ranked
fifth with $11.79 billion in advisory work in Brazil, compared
with a ranking of 17 at this time last year.
    Wainstein, of Goldman Sachs, expects M&A activity to recover
as buyout firms - which last year raised $6.3 billion for their
Brazil investments - resume purchases in the retail,
infrastructure and consumer goods sectors. Bidders may take
advantage of lower valuations caused by a year-long economic
downturn to step up acquisitions, bankers said.
    Media reports say local steelmaker CSN is
considering a bid for ThyssenKrupp's money-losing
SteelAmericas unit. And Vivendi, Europe's largest media
company, may sell its Brazilian unit GVT to raise cash, sources
told Reuters recently.
    According to Marco Gonçalves, head of M&A at BTG Pactual, a
$33 billion government plan to boost infrastructure investment
in roads and ports will create "massive opportunities for our
clients for the coming months."
    More private equity firms from the United States and
sovereign wealth funds from Asia and the Middle East are also
eyeing Brazilian companies now that the local currency, the real
, has lost some ground against the U.S. dollar, both
Pactual's Gonçalves and Goldman's Wainstein said.
    Strategic buyers, especially deep-pocketed local players in
the mining, banking and consumer goods industries, are on the
lookout for takeover targets in a country where more than 40
million citizens joined the middle class in the past decade,
Credit Suisse's Pereira noted. 
    With interest rates expected to remain near all-time lows
well into 2013, M&A deals will become more appealing for buyout
firms. "The level of activity in this segment is good, and looks
even better for the coming months as the cost of capital
declines," Wainstein said.
    The following is a table with year-to-date rankings:
================================================================
FINANCIAL ADVISER     VALUE        RANK     NUMBER OF   MARKET
                     OF DEALS   2012  2011  2012 DEALS  SHARE
================================================================
Credit Suisse       $19.31 bln    1     4      30      35.8 pct
Itau BBA            $19.11 bln    2     1      51      35.4 pct
Citigroup GB&M      $16.27 bln    3    11       8      30.1 pct
BTG Pactual         $14.48 bln    4     2      64      26.8 pct
JPMorgan Chase      $11.79 bln    5    17      11      21.8 pct
Goldman Sachs       $10.77 bln    6     3       8      20.0 pct
Bradesco BBI        $10.30 bln    7     6      25      19.1 pct
Rothschild & Co     $10.20 bln    8     9      14      18.9 pct
Bank of America      $9.71 bln    9     8       8      18.0 pct
BR Partners          $7.15 bln   10    19       9      13.3 pct
================================================================
INDUSTRY TOTAL      $53.989 bln               596
================================================================
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