April 2, 2013 / 1:00 PM / 5 years ago

Caution drives Brazil M&A deals to worst start since 2005

* Bankers see 79 pct drop in value of deals as temporary
    * Conclusion of key deals put off on price disagreements
    * Six local banks join top-ten M&A ranks for first time

    By Guillermo Parra-Bernal and Aluísio Alves
    SAO PAULO, April 2 (Reuters) - Mergers and acquisitions
activity in Brazil this year got off to its worst start since
2005 as buyers, fretting over growing state intervention and a
weak economy, held off on some sizeable deals to get better
terms.
    Companies announced $6.069 billion worth of deals in Brazil
between January and March, down about 79 percent from a year
earlier, according to a quarterly Thomson Reuters report on M&A
activity. That's the lowest total for the first quarter since
$4.68 billion in M&A deals were announced eight years ago.
    Some transactions that were slated to close early this year,
like the sale of the local units of ThyssenKrupp AG 
and media giant Vivendi SA, were put off after bids
came in below the asking price. The number of deals fell to 121
from 189 in the last quarter of 2012, the report said.
    Nonetheless, bankers are confident that a recovery could be
right around the corner, citing a robust deal pipeline as buyout
firms look out for takeover targets. They shrugged off the view
that a timid M&A recovery, mounting government interference and
a flagging economic expansion in Brazil are crimping deals.
    "It was a different start, but it wasn't bad. Valuations are
attractive and buyers are looking for opportunities across the
board," said Marco Gonçalves, head of M&A for BTG Pactual Group
, whose bank topped the M&A rankings in Brazil in the
first quarter. "Last quarter was sort of a transition period."
    The volume of M&A transactions fell to a five-year low in
2012 as government intervention in some sectors of the economy
weighed on market sentiment and Brazil lost some clout with
investors. President Dilma Rousseff put pressure on banks and
utilities, creating uncertainty about returns in those sectors.
    That highlighted some of the policy risks in Latin America's
largest country as the government used regulatory powers 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.
    For investment banks, which depend on merger advisory for
about half their revenue in Brazil, recent signs that Rousseff
is turning friendlier to businesses is positive. An unexpected
fuel price hike, plans to sell ports to private investors, a
renewed focus on fighting inflation and less pressure on banks
to cut lending rates are fanning optimism among dealmakers.
    "It's premature to say that this year will be worse than
last. The year simply started in a slow fashion, but we have a
promising recovery ahead of us," said Fabio Mourão, managing
director for M&A at Credit Suisse Group in São Paulo. 
    Citigroup Inc.'s plan to sell its consumer financing
unit and car dealership group CAOA's failed attempt to purchase
bankrupt lender Banco BVA SA may only be finalized in coming
months. Buyers are pressing for lower prices, while sellers
might be taking advantage of robust valuations in the country.
    "It's an issue of the length of the gestation period of each
transaction, which is getting longer," said Antonio Pereira,
co-head of investment banking for Goldman Sachs Group Inc.
 in Brazil.     
    
    BTG PACTUAL LEADS
    M&A activity rose a meager 0.8 percent in the first quarter
from the prior three months. Europe's debt crisis and an
economic slowdown in China have investors and dealmakers
cautious around the globe too.
    Banks are also likely to remain cautious, even if advisory
work presents a sharp recovery. 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.
    "There's no easy deal anymore these days," said Alexandre
Farkuh, head of M&A for Bradesco BBI, the investment-banking
unit of Banco Bradesco SA. "Transactions are coming
in smaller, but things should get better."
    During the first quarter, BTG Pactual, controlled by
billionaire financier André Esteves, overtook Credit Suisse as
Brazil's top M&A advisory firm in terms of deal size from the
fourth quarter. The firm has become so influential that
billionaire Eike Batista, struggling with a $20 billion drop in
his fortune in the past year, turned to BTG Pactual to help him
overhaul his businesses. 
    Without taking into account the Batista-BTG Pactual deal,
Gonçalves expects his area to "grow between 30 percent and 40
percent this year alone." Batista is seen to cut stakes in some
of its holdings by half. 
    BTG Pactual advised on $1.9 billion worth of transactions in
the year through March 31, followed by Banco Santander SA
 - its best showing in the rankings since 2010.
    Gonçalves and his team at BTG Pactual helped sell language
school Wise Up to education company Abril Educação SA
 for $443 million. Itaú BBA, a unit of Brazil's
largest private-sector lender Itaú Unibanco Holding SA
, advised Abril on the deal.
    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. 
    Six local investment banks were among the Top 10 M&A
advisors in Brazil for the first time, the report showed. One of
them, Estater Gestão e Finanças, which ranked seventh, is an
advisory-only shop, while Banco Brasil Plural and XP
Investimentos figured in the top ten for the first time.
    BTG Pactual topped the ranking in number of deals advised
with four, the same as Itaú BBA and Bradesco BBI. Itaú BBA
ranked fifth in terms of value of transactions.
        
    INFRASTRUCTURE COMES TO THE RESCUE
    Foreign banks like Credit Suisse, which ranked sixth, will
likely recoup ground in coming months as private equity and
sovereign wealth funds look for advisors with a global reach to
help them on their Brazilian deals.
    Pereira of Goldman Sachs expects M&A activity to recover as
buyout firms - which last year poured a record $5.7 billion into
their Brazil investments - resume purchases in the consumer
goods and infrastructure sectors. He sees takeovers in the power
industry gaining momentum in coming months.
    And 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 people joined the middle class in the past decade, BTG
Pactual's Gonçalves noted. 
    Goldman Sachs advised E.ON SE on its $1 billion
purchase of a 24.5 percent stake in Batista-controlled power
utility MPX Energia SA. Credit Suisse advised mining
outfit CMAA on its $72 million sale.
    The following is a table with year-to-date rankings:  
================================================================
FINANCIAL ADVISER     VALUE        RANK     NUMBER OF   MARKET
                    OF DEALS    2013  2012    DEALS     SHARE
================================================================
BTG Pactual         $1.900 bln    1     1       4      31.3 pct
Banco Santander     $1.393 bln    2     8       2      23.0 pct
Bradesco BBI        $1.033 bln    3     2       4      17.0 pct
Goldman Sachs       $703.8 mln    4    17       1      11.6 pct
Itaú BBA            $599.3 mln    5     4       4       9.9 pct
Credit Suisse       $343.7 mln    6     5       2       5.7 pct
Estater Gestão      $273.7 mln    7     -       1       4.5 pct
Barclays            $208.1 mln    8     -       2       3.4 pct
XP Investimentos    $135.6 mln    9     -       1       2.2 pct
Brasil Plural       $135.6 mln   10     -       1       2.2 pct
================================================================
INDUSTRY TOTAL      $6.069 bln                 121
================================================================

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