| SAO PAULO, July 2
SAO PAULO, July 2 Mergers and acquisitions in
Brazil are expected to gain steam by the year-end as economic
and political risks ease, helping companies and private-equity
firms scouring for takeover targets focus on tapping the
country's long-term potential.
Three years of sub-par economic growth, a weaker currency
and declining profits have driven asset prices lower and boosted
the appeal of takeover targets. But some acquisition hunters
could remain cautious ahead of a presidential election in
October, making it harder for bids and offers to converge before
then, bankers said.
Companies announced about $28.328 billion worth of deals in
Brazil in the first half of the year, up 34 percent from $21.006
billion in the same period in 2013, a quarterly Thomson Reuters
report on M&A activity showed on Wednesday. About 221 deals have
been announced so far this year, down from 303 a year earlier.
Strategic buyers are brushing caution aside and seeking
greater exposure to Brazil, some in search of a specific asset,
others to tap the country's massive consumer base and need for
infrastructure. Buyout firms are also on the prowl, eyeing
targets in sectors such as financial services and technology,
while also looking to exit some investments.
"There are sectors in which the only way for some players to
grow in Brazil is through M&A," said Fernando Iunes, global
managing director for investment banking at Itaú BBA. "Sooner or
later, these players will buy assets in Brazil to avoid seeing
their cost of opportunity grow."
Michelin & Cie SCA, American Tower Corp
and KKR & Co LP were among companies that raced to seal
takeovers last quarter. The weakest start for local equity
markets in six years is helping fan takeovers, providing capital
for firms and shareholders alike, said Patricia Moraes, JPMorgan
Chase & Co's head of investment banking in Brazil.
But the flow of deals fell in the second quarter as election
uncertainty, slower activity during the World Cup and weak
confidence delayed the conclusion of some deals. The number of
transactions fell to 104 from 117 in the prior quarter, although
total deal value rose 3.3 percent to $14.396 billion.
Luiz Muniz, head of Latin America investment banking for
Rothschild, said he is not worried about the slowdown, and is
encouraged by increased activity in deals of greater complexity
such as inbound cross-border takeovers, de-listings, corporate
reorganizations, debt restructurings and spin-offs.
Veteran dealmaker Muniz and peers expect M&A activity to
gather steam, especially during the fourth quarter.
An example of this is Banco Santander SA's plan to
buy the stake it does not own of Banco Santander Brasil SA
for $6.5 billion - this year's biggest deal so far.
Deals such as Santander Brasil's reflect a balance between
buyers' optimistic perception about Brazil's long-term prospects
and attractive M&A valuations in some sectors, said Marco
Gonçalves, head of M&A for Grupo BTG Pactual SA.
"With valuations at these levels, people looking at the long
run want to take on more risk," Gonçalves said. "Bidders feel
they can offer better premiums than equity markets to a seller."
In the first half, Banco Santander and Itaú BBA topped
league tables in terms of deal value and number of transactions,
respectively. BTG Pactual ranked second in number of deals,
while Rothschild took the No. 2 slot in value of deals.
Santander has worked on 14 deals this year worth a combined
$15.16 billion, the report showed. Santander and Rothschild are
working together on the Santander Brasil deal, which is expected
to be concluded in October.
Rothschild, which has advised on some blockbuster deals
since setting up shop in Brazil in 1989, worked on nine deals
worth $12.96 billion in the first half.
Itaú BBA, which helped Fertilizantes Hering SA with its sale
to Morocco's OCP International last month, has advised on 36
transactions this year worth $11.06 billion.
IN THE RAIN
Some bankers worry that newcomers lack the conviction that
long-standing players have about Brazil's potential. Uncertainty
over growth, inflation and future economic policy decisions
could cloud the M&A outlook.
"Those who have been in the rain for longer will be more
predisposed to venture into new things, unlike those who don't
know the risk," said Flavio Valadão, Santander's managing
director for M&A and equity capital markets in Brazil.
Valadão foresees M&A flourishing in areas where government
intervention tends to be limited.
The economy is cooling abruptly and economists do not see a
major rebound next year. While the downturn has had limited
impact on the nation's job market, profits are suffering.
Concerns about Brazil's outlook could drive smaller rivals
to give in to takeovers, said Venilton Tadini, chief executive
of mid-sized Banco Fator SA, which joined the ranks of Brazil's
top-10 M&A advisors. Once the election is over, disagreements
over price between bidders and sellers will abate further, he
(Editing by Todd Benson and Andre Grenon)