(Adds information on fees for the quarter)
By Guillermo Parra-Bernal
SAO PAULO, April 2 (Reuters) - The value of mergers and acquisitions in Brazil in the first quarter slipped to its lowest in two years, as slumping confidence and an economic downturn prevented buyers and sellers from finalizing deals in Latin America's largest economy.
In the year through March 31, companies showed $8.51 billion worth of corporate takeovers in Brazil, according to a Thomson Reuters report on M&A activity released on Thursday. Some 122 deals were announced in the quarter, up from 119 a year earlier.
Corporate tie-ups, restructurings, delistings and spin-offs may gradually gain momentum in coming months as lower asset values and a weaker currency boost the allure of local businesses for multinational firms and investment funds, bankers and M&A lawyers said. But the process will not be linear.
An economy on the verge of recession is helping make some potential targets cheaper but is also widening the gap between asking prices and bids. Worries over President Dilma Rousseff's ability to reverse years of erratic policies are fanning uncertainty and further stretching out that gap, bankers said.
"This year will be a year of complexities as deals should take longer to be concluded," said Alessandro Farkuh, head of M&A for Bradesco BBI. "Good opportunities will arise, but we believe the outlook will remain challenging."
Rothschild's Brazilian unit and Itaú BBA, Itaú Unibanco Holding SA's wholesale and investment banking unit, topped last quarter's Brazil M&A rankings in terms of value and number of deals, respectively.
Rothschild, led by veteran dealmaker Luiz Muniz, advised on three deals worth $5.88 billion during the quarter. Itaú BBA's investment banking unit, led by Jean-Marc Etlin, advised on four deals, including Duratex SA's purchase last month of bathroom fittings maker DuchaCorona Ltda.
Brazil's largest announced deal in the quarter was British America Tobacco Plc's planned $3.5 billion buyout of the 24.7 percent stake it does not have of cigarette producer Souza Cruz SA. UBS AG, Rothschild, Deutsche Bank AG and Banco Santander SA are working on that deal.
As Brazil flirts with recession and companies are forced to exit segments, fire staff and renegotiate looming debt payments, M&A bankers are hopeful that the backlog of work will grow.
Fallout from a corruption scandal involving state-run oil producer Petróleo Brasileiro SA and some contractors will likely force them to sell assets or restructure debt. Banks and law firms including Bradesco BBI, Itaú BBA and Alvarez & Marsal Holdings LLC are winning mandates to handle some of those transactions, which could be finalized later in the year.
"There are interesting situations and the long-term prospects remain solid," said Ignacio Benito, managing director for Latin America M&A and equity capital markets at JPMorgan Chase & Co. "The current volatile political and economic situation could open new opportunities and expectations as to what comes next vary widely."
For Maria Cristina Cescon, a founding partner at law firm Souza Cescon Barrieu & Flesch Advogados, some companies that are vulnerable to Brazil's downturn are looking to sell to larger rivals. Shareholder disputes and efforts by some groups to exit non-core assets may propel M&A transactions this year, she said.
The likelihood that domestic equity markets will stay partially shut for months may also bolster M&A activity, said Alessandro Zema, Morgan Stanley & Co's head of Brazil investment banking. Equities are more correlated to short-term perceptions of a stable economic backdrop than M&A, which hinges more on long-term expectations.
"The M&A market is providing the exit for investors that equity markets aren't," Zema said.
According to Mark Rosen, Bank of America Merrill Lynch's head of Latin America investment banking, local and foreign companies could boost their exposure to Brazil this year through purchases to meet a specific strategic need.
Private equity firms, flush with cash as they fetch record money for their Latin American investments, are on the prowl to take advantage of declining valuations, Rosen added.
Most bankers expect advisory fees, as well as the number of announced deals and deal volumes, to remain more or less stable from last year. In recent months, some banks such as Société Générale SA have exited banking segments such as consumer finance while others like Barclays Plc or Deutsche Bank have trimmed their investment banking roster here.
Brazil's share of the region's total fee pool - which includes M&A as well as stock and bond sales - slipped to a record-low 34 percent last year, according to data by capital markets data firm Dealogic.
According to Thomson Reuters and consulting firm Freeman & Co, Rothschild and Grupo BTG Pactual SA collected most in imputed fees in the quarter, with $16.5 million and $13.1 million, respectively. (Editing by Todd Benson and Ted Botha)