| SAO PAULO
SAO PAULO Jan 2 Mergers and acquisitions
activity in Brazil is expected to accelerate early in 2014
despite risks from a presidential election and global market
turmoil, with a weaker currency and cheaper valuations
presenting opportunities to clinch deals.
The presidential election in October could slow activity in
the second half however, although private equity firms will keep
scouring for favorable takeovers following a drop in the value
of some firms in 2013, bankers said.
Many investors expect political wrangling ahead of the
election to further weigh on market confidence, which has
already been rattled by the Brazilian government's erratic
policy decisions and mounting state meddling in the economy in
But dealmakers are hopeful the noise won't have too much of
an impact on M&A activity in Brazil. A pipeline with a
significant number of transactions could materialize into done
deals with the proper catalyst - which could be a quiet ballot,
a weaker currency or faster growth.
"2014 will be a challenging year but I see a solid deal
pipeline waiting out there," said Fabio Mourão, a managing
director for investment banking at Credit Suisse Group in São
Paulo. "Deals will only be concluded as long as market
conditions permit, but prospects look good."
Deal making in Brazil got off to a slow start in 2013, with
M&A activity measured by the value of deals falling to the
lowest reading in eight years in the first half of the year. But
activity picked up after that as the government auctioned off a
flurry of airport, toll road and oil field concessions,
promising higher returns and ample credit for the ventures.
In 2013, companies announced $74.43 billion worth of deals
in Brazil, up about 5.7 percent from $70.40 billion a year
earlier, according to a quarterly Thomson Reuters report on M&A
activity. However, that number is down from $80.59 billion in
deals in 2011 and $164.29 billion in 2010.
Still, when measured in terms of the number of deals, 2013
was not that favorable for M&A bankers, the report showed. About
611 deals were announced last year, down from 823 in 2012.
"A flagging economy, political uncertainty and poor
operational performance of some companies played a negative
influence on confidence, especially for strategic M&A
decisions," said Pedro Costa, head of M&A at Morgan Stanley &
Co's Brazilian unit.
While year-on-year comparisons show mixed results, M&A
activity surged about 250 percent between the first and second
half of last year as sellers sought less for their companies,
while worries that the U.S. government would taper off years of
economic stimulus subsided.
Grupo BTG Pactual SA led Brazil's M&A rankings
in 2013 as Chief Executive André Esteves's focus on advising
fast-growing segments translated into almost $22 billion of
deals in the October-December period alone, the report showed.
BTG Pactual, Latin America's largest independent investment
bank, advised on $34.547 billion worth of deals last year, more
than twice the $15.9 billion of transactions in 2012. In terms
of the number of deals, BTG Pactual worked on 51 transactions in
2013, compared with 73 in 2012. These included Grupo Oi SA's
planned takeover of Portugal Telecom SGPS.
Marco Gonçalves, BTG Pactual's head of M&A, said the first
half of this year "will be pretty good for business, but
election-related uncertainty might cool things a bit."
In 2014, BTG Pactual expects to advise on a number of M&A
deals "similar or slightly above" the 2013 tally, Gonçalves
said. Deal values may suffer if large transactions fail to
materialize, he added.
The M&A advisory business in Brazil has suffered in recent
years as state intervention in the economy weighed on market
sentiment and fears of a U.S. Federal Reserve-led tightening of
global monetary policy sparked market volatility.
But in recent months, signs of a more business-friendly
economic policy framework emboldened investment banks, which
depend on merger advisory services for about half their revenue
in Brazil. President Dilma Rousseff's push to woo investment in
infrastructure is fanning optimism that interference will wane,
Banks may remain cautious, however, even if there is a sharp
recovery in advisory work in 2014. Staff and capital levels are
seen as adequate, meaning that any pick-up in work is unlikely
to lead to massive hiring, or more capital being deployed into
Indeed, market noise during the election could pose a hurdle
to deals, bankers said.
Brazilians elect a new president, federal and state
lawmakers and 27 governors in October. While early polls show
Rousseff as a clear favorite for re-election, opposition
candidates could gain ground if economic growth falters or
inflation accelerates further, analysts say.
Corporate takeovers in the consumer goods and services and
infrastructure sectors are likely to remain the main driver for
activity this year, said Hans Lin, co-head of investment banking
at Bank of America Merrill Lynch in São Paulo.
Jean-Marc Etlin, senior vice president for investment
banking at Itaú BBA, expects private equity funds to seek more
takeovers now that Brazil's currency, the real, is near
its lowest level in four years and may slip further in 2014. A
weaker real makes it cheaper for dollar-funded buyout firms to
buy assets in Brazil.
Strategic buyers are now hesitant given the potential for
local and global turmoil, he added, forcing bidders to design
and execute their takeover strategies in "a more careful way."
Renato Ejnisman, head of investment banking at Bradesco BBI,
said buyers will probably seek more exposure to Brazil based on
their need to get a specific asset, and not because of the
country's status as an emerging market with growth potential.
"M&A bets will be directed bets, which will be more
specific-asset-related than country-related," he added.