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SAO PAULO, Sept 2 (Reuters) - Brazil's long-dormant equity capital markets could be set for a revival in the coming months that might help offset slower-than-expected merger and acquisition activity, bankers said.
Growing appetite for risk among local investors and expectations of a more business-friendly government after the ouster of former President Dilma Rousseff could help resuscitate a market that has seen only one initial public offering over the past 23 months, the bankers said. That compares with 10 over the previous two years.
While IPOs are not imminent, bankers at Itaú BBA SA and Morgan Stanley say they expect between five and seven more offerings to take place before year-end.
Brazil's benchmark stock index is up 35 percent this year, the world's second-best performer, on optimism about Rousseff's replacement by her former vice president, Michel Temer.
Stung by dozens of capital-raising deals that fell short of promised returns during Rousseff's five years in office, foreign investors in particular are wary of equity offerings in Latin America's biggest economy.
However, they could quickly return if Temer effectively tackles Brazil's budget problems and reignites confidence in the economy, said Roderick Greenlees, Itaú BBA's global head of investment banking.
"There is a situation of repressed demand for capital, which can lead more companies to go ahead with their offering plans," Greenlees said in an interview, suggesting there is pent-up appetite for such deals.
A renewed flow of equity offerings could lead to the reworking of some M&A deals now being negotiated, according to bankers including Marcus Silberman, head of Brazil M&A at Bank of America Merrill Lynch.
The equity market's revival comes after dozens of M&A deal talks ran aground in recent months as buyers and sellers split over valuations and worried that the nation's political crisis could trigger regulatory or tax changes.
One example is homebuilder Gafisa SA, which is leaning toward listing low-income home unit Construtora Tenda SA rather than selling part of it to a partner in the belief that an IPO could fetch more, people told Reuters last month.
Likewise, Carlyle Group LP and CVC Brasil Operadora SA founder Guilherme Paulus' failure to find a buyer for their majority stake in the travel agency led them to sell part of their holdings through a public offering.
M&A transactions accounted for half of Brazil investment-banking advisory fees over the past four years. In the past year, equity underwriting fees in Brazil have fallen more than 50 percent to $51 million - an amount equivalent to a quarter of M&A advisory proceeds in the same period, Thomson Reuters and Freeman Consulting data show.
Itaú BBA, Brazil's largest investment bank, expects companies to raise up to 10 billion reais ($3.1 billion) this year from offerings.
In many cases, companies raising new equity will do so while at the same time exploring a full or partial sale to a strategic buyer, Bank of America's Silberman said.
Access to funding will also help cash-strapped companies raise capital at a time when bankruptcy filings have hit a record. Others view offerings as a way to fuel expansion as the country's economy revives.
Still, increased offerings may be a mixed blessing for private equity funds, said Eduardo Miras, co-head of Brazil investment banking at Morgan Stanley.
"Although private equity sponsors may have to pay more to invest in companies, active public equity markets give them an additional alternative for divestments," he said.
BRF SA's Middle East-based food processor Sadia Halal, and medical imaging provider Centro de Imagem Diagnósticos SA, which filed for an IPO this week, are among candidates for listing debuts. Call center firm Contax Participações SA also recently filed to sell shares in a private placement.
According to bankers, the return of cash-flush foreign investors is a necessary condition for the success of offerings next year.
Companies and shareholders raised about $1.9 billion from Brazilian follow-on offerings this year, according to Thomson Reuters and bourse operator BM&FBovespa SA data. The number does not include private placements and restricted-efforts deals.
Last year follow-ons and IPOs raised over $5 billion.
The value of Brazilian corporate takeovers fell 11 percent to $21 billion in the year through Aug. 31 from the year-earlier period, while the number of announced M&A transactions slumped 16 percent from a year ago, Thomson Reuters data show.
$1 = 3.2272 Brazilian reais Additional reporting by Robert Levine in New York; Editing by Christian Plumb and Bill Rigby