July 2, 2012 / 4:35 PM / 5 years ago

Brazil M&A activity seen gaining steam by year's end

* Market woes, slowdown spark caution in Brazil M&A
    * Private equity seen spurring more deals this year
    * Deal volumes rise 7.1 percent to $44.706 billion

    By Guillermo Parra-Bernal and Aluisio Alves
    SAO PAULO, July 2 (Reuters) - Mergers and acquisitions
activity in Brazil is likely to gain steam by year's end when
the benefits of measures to revive growth will be more visible
for companies and private equity firms seeking takeovers in
Latin America's largest economy. 
    Multinational and homegrown companies betting on Brazil may
take advantage of lower valuations caused by an economic
slowdown and declining prospects for profitability to step up
acquisitions, according to five bankers interviewed by Reuters.
    Likewise, private equity firms that last year raised a
record $6.3 billion for their Brazil investments postponed many
of their planned purchases of retail, consumer goods and
infrastructure firms as the outlook for the economy turned
blurry, the bankers said. 
    "All this uncertainty, the changes in valuations, is
basically making it harder for bids and offers to converge,"
said Renato Ejnisman, who heads the investment-banking division
of Bradesco BBI, the wholesale banking unit of Banco Bradesco
, Brazil's second-largest private sector bank. 
    "We hope that in the coming months, that divergence eases as
conditions improve globally and locally," he added.
    Brazil's economy slowed abruptly in the first half of this
year and is unlikely to rebound strongly before year-end. While
the slowdown has had little impact on Brazil's bustling job
market, it has hampered manufacturing and lessened incentives
for companies to merge by lowering earnings expectations for the
near future.
    Economic growth came in at 1.9 percent in the 12 months
through the end of March, the slowest pace of expansion in three
years. Inflation, which only a few months ago slightly surpassed
the central bank's official target for the year, is rapidly
converging to the target's mid-point -- a sign that economic
activity is stagnating. 
    The volume of M&A transactions in Brazil rose in the first
half of the year despite the economic downturn, still-high risk
aversion and market turmoil that have all put the brakes on
investment plans.
    Companies announced about $44.706 billion worth of deals in
Brazil in the first half, up 7.1 percent from a year earlier, a
Thomson Reuters quarterly report on M&A trends showed on Monday.
The number of deals rose sharply to 417 from 364 in the same
period of 2011.
    Brazil, which surpassed Britain last year to become the
world's sixth-biggest economy, is still luring a large number of
sophisticated investors, said Fabio Mourão, head of Brazil
mergers and acquisitions for Credit Suisse Group in Sao Paulo.
    More companies from United States and specialized investors
from Asia and the Middle East are also setting their sites on
Brazilian companies now that Brazil's currency, the real,
has lost some ground against the U.S. dollar, he added.
    "I certainly expect 2012 to be stronger than 2011 on the M&A
front -- there are a handful of good transactions in the
pipeline," Mourão said in an interview.
    Recent changes in antitrust laws helped spur the number of
announced M&A deals since April, bankers said. Under changes
passed by legislators this year, antitrust regulators must issue
a preliminary approval before the plans can be announced.
    Foreign and local banks continue to bet on investment
banking as a stable source of earnings despite Brazil's weaker
economic performance and a possible slump in fees. Fees in
Brazil will probably fall below the $800 million earned by banks
last year, according to estimates by leading investment bankers.
    "The outlook might not be as promising as it was a year or
two ago, but the opportunities are there and despite the greater
caution, I don't see activity or fees slowing too dramatically,"
said Jorio Salgado, managing director for M&A at BR Partners, a
local investment banking boutique.
    
    OUTSTANDING TRACK RECORD
    For the fifth straight quarter, local investment banks
trumped their global rivals for the most lucrative deals. Unlike
their counterparts in other emerging market nations, Brazilian
banks are besting their foreign rivals at funding deals, forging
stronger client ties and setting up distribution networks
similar to those of global banks. 
    Four local banks made it to the top-10 rankings, showing the
degree to which confidence in Brazil remains robust even as
risk-taking wanes in the face of Europe's debt crisis. Despite a
decline in the average value of transactions this year, foreign
and local firms see Brazil as a long-growth destination.
    Brazilian companies are focusing on the domestic market
after three years of aggressive overseas expansion. According to
central bank data, local companies spent $2 billion abroad in
acquisitions in the first five months of the year, compared with
$13.8 billion in the same period in 2011 and a combined $45
billion in 2009 and 2010.
    "Brazil continues to be a market with enormous potential,"
Roberto Barbuti, Bank of America Merrill Lynch's co-head of
Brazil investment banking, said in an interview. 
    Itau BBA, the investment banking unit of banking giant Itau
Unibanco Holding, led Thomson Reuters' M&A rankings
in the first half in terms of value of deals, after advising on
$20.04 billion worth of transactions in the first six months. 
    BTG Pactual, the investment-banking powerhouse
controlled by billionaire financier Andre Esteves, led rankings
in number of deals after advising on 38 transactions. 
    Both Itau BBA and BTG Pactual want to replicate their
success at home by expanding in Latin America. BTG agreed to buy
Colombia's Bolsa y Renta last month, while Itau BBA began
wholesale banking operations there recently.
    Credit Suisse ranked second, with $16.74 billion worth of
M&A advisory work. Bradesco BBI and BR Partners ranked 4th and
10th in terms of deal size, respectively. 
    The following is Thomson Reuters' ranking for announced M&A
deals for Brazil in the first half:
================================================================
FINANCIAL ADVISER     VALUE        RANK     NUMBER OF   MARKET
                     OF DEALS   2012  2011  2012 DEALS  SHARE
================================================================
Itau BBA            $20.82 bln    1     1      31      44.8 pct
Credit Suisse       $16.74 bln    2     4      20      37.5 pct
Citigroup GB&M      $15.53 bln    3    16       7      34.7 pct
Bradesco BBI        $11.29 bln    4     6      25      25.3 pct
BTG Pactual         $11.24 bln    5     5      38      25.1 pct
Goldman Sachs        $9.77 bln    6     2       4      21.8 pct
Bank of America      $9.26 bln    7     7       6      20.7 pct
Rothschild & Co      $8.68 bln    8     9       6      19.4 pct
JPMorgan Chase       $7.78 bln    9    18       7      17.4 pct
BR Partners          $7.16 bln   10    20       6      16.0 pct
================================================================
INDUSTRY TOTAL      $44.706 bln              417
================================================================

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