Amid the carnage: M&A opportunities in Brazil
June 2016 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
As a general rule, a moribund economy can expect the corporate vultures to begin circling its carcass fairly quickly, with the tastiest assets at risk of being soundly cherry-picked. This makes for an apt description of the currently dire economic and political situation in Brazil, whose crash has indeed been calamitous – a disaster of staggering proportions.
And as a consequence of the country’s woes, which include its worst recession in over 100 years and the impeachment of president Rousseff, overseas investors – most notably from the US, Europe and Asia – have been eyeing the carnage to identify the mergers & acquisitions (M&A) opportunities that are available.
Most certainly, M&A opportunities have been plentiful in Brazil over the past year, with notable deals including New York-based Coty’s $1bn acquisition of Hypermarcas SA in November 2015 and, in the same month last year, the transaction which saw Singapore’s GIC Pte Ltd and Carlyle Group LP acquire Rede D’Or São Luiz SA, the largest private hospital operator in Brazil.
Testifying to the current extent of overseas interest in Brazil is the fact that, for the first time since 2000, foreign M&A investment is now outpacing domestic deals.
M&A activity risks
M&A transactions involving Brazilian targets and foreign acquirers have been flourishing in recent months. Opportunities involving some of the country’s key assets, such as ports, power generation, roads and commodities extraction, have been particularly attractive to overseas investors.
However, while some of the big Brazilian conglomerates do need to radically refinance their balance sheets by selling off some of their assets, Stephen Lock, senior vice president & country manager at Speyside Corporate Relations, recognises that M&A transactions, particularly those involving privatise concessions, also have potential risks. “In two or three years, a prosecutor may uncover evidence of corruption in the original tender process and just nullify the tender,” he suggests. “A foreign buyer of that asset would then lose the lot. In practice it is hard to quantify that risk, and there are insurance products out there to cover that eventuality, but the cost of them reduces investment return and just having to explore this risk may make some international boards and investment committees want to pass on this type of Brazilian acquisition.”
He adds that some businesses have started to auction off non-core assets and ‘shrink to fit’ their balance sheets, as foreign currency borrowing has become unaffordable and domestic borrowing rates remain sky high. “That said, I think the IPO market may kick into life later this year, assuming a pathway to resolving the political crisis, and a settled consensus that 2017 will be a year of economic stability – if sterility – and a return to above trend GDP growth in 2018.”
Regulation and legislation in Brazil
Of course, a major concern for those looking to invest in Brazil relates to existing regulatory frameworks and to what extent they assist in the review of M&A deals. Not only can stringent regulation help combat bribery and corruption in the region, it can also play a part in the beleaguered republic eventually overcoming the major economic and political difficulties it currently faces.
“The truth is that Brazil has a strong legislative and court process for punishing bribery, that’s why we have so many billionaires going to prison,” confirms Mr Lock. “Indeed, the fact so many businessmen from elite families are being jailed will likely result in an important cultural shift where the private sector is less keen to bribe politicians for public sector contracts. Equally, given the profound economic crisis in Brazil, I doubt we will see so many state-entity funded projects, which were the source of much of this corruption. At the same time, this may also pose new questions about party political funding, since most of this bribery cash was being used to fund election campaigns. A move to state funding of elections may be the eventual outcome of these extraordinary times.”
M&A in Brazil: “a market for the brave”
With the economic and political outlook in Brazil expected to be catastrophic for some time to come – damaged as it by a faltering economy and a corruption scandal involving state-controlled oil giant Petrobras which has embroiled senior politicians and business leaders – the M&A opportunities for foreign investors will certainly continue, albeit with some areas of concern attached.
“It is a market for the brave,” asserts Mr Lock. “Until we see a return to GDP growth, the decision to invest is not an easy one for global boards. However, a relatively weak currency makes it an undoubted window of opportunity for those with a long term view, deep pockets and a relatively high tolerance for risk.”
Although being witness to a country’s political and economic meltdown is hardly a desirable prospect for most people, for investors eyeing the calamitous mess in Brazil at present, the situation presents a sea of opportunities.
Looking forward, dealmaking activity in the republic is expected to remain steady throughout the remainder of 2016 as investors, both foreign and domestic, pursue M&A deals amid the continuing economic and political carnage.
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