Brazil M&A deals tougher to close amid economic and political turmoil
By Guillermo Parra-Bernal and Tatiana Bautzer SAO PAULO, April 13 (Reuters) - Brazil's harshest recession in decades and deepening political turmoil are preventing buyers and sellers from finalizing dozens of mergers and acquisitions amid wide disagreements over valuations, according to dealmakers. Mergers in Latin America's biggest economy got off to their worst start in more than a decade in the first quarter as buyers, wary of growing economic imbalances and fallout from a corruption probe and impeachment proceedings that risk toppling President Dilma Rousseff, held back as they sought to win better terms on some deals, bankers said. Though two straight years of economic contraction and a weak currency have helped trim the value of some takeover targets, owners are resisting cheap sales - widening the gap between bid and asking prices. As a result, multinationals and buyout firms are taking longer than usual to analyze targets and execute due diligence work to assess fair value. "The biggest challenge in times of high uncertainty like this is to bridge the diverging pricing views between buyers and sellers, and to value an asset adequately," said Bruno Amaral, a partner at Grupo BTG Pactual SA, Brazil's top M&A adviser in the first quarter of this year, according to Thomson Reuters data. Companies announced $3.813 billion worth of deals in Brazil between January and March, down 34 percent from a year earlier and the lowest for the period since 2003, a Thomson Reuters deals intelligence report showed. The number of announced deals fell to 134 from 157 a year earlier. São Paulo-based BTG Pactual topped both value and number of deals rankings last quarter, after working on 10 transactions worth $2.779 billion. The feat followed months of turmoil sparked by the arrest of BTG Pactual's founder André Esteves for allegedly working to obstruct the massive Brazil corruption probe known as Operation Car Wash. The detention of Esteves, Brazil's top dealmaker for years, fueled heavy client fund withdrawals and sent BTG Pactual stock into a tailspin. Yet, the bank's M&A franchise survived the storm practically unscathed as bankers stayed put in the face of balance sheet downsizing and dismissals. GROWING LIST BTG Pactual's M&A team, led by veteran dealmaker Marco Gonçalves, were lead advisers in the biggest announced deal last quarter; BTG Pactual's $1.34 billion sale of Switzerland-based private-banking arm BSI SA to EFG International AG. Transactions slated to close months ago - such as state-controlled Petróleo Brasileiro SA's sale of a stake in a fuel distribution unit and steelmaker Cia Siderúrgica Nacional SA's disposal of a container terminal operator - have stalled as bids came in below the asking price, sources familiar with the transactions said. Similar issues put off Hypermarcas SA's sale of a diaper unit, the sources said. Petrobras is being advised by Citigroup Inc, while the steelmaker known as CSN hired Credit Suisse Group AG, Banco Bradesco SA and Banco do Brasil for the sale. In recent weeks, Petrobras also halted plans to exit Braskem SA, Latin America's largest maker of resins, sources said. Potential buyers fretted about the involvement of Grupo Odebrecht SA, Braskem's main shareholder, in the Car Wash probe. Yet, banks and lawyers expect companies trying to refinance over 100 billion reais ($28 billion) in debt to cave in to pressure from creditors and speed up asset sales, which could drive price tags lower in coming months. "Sectors in which you could see relevant transactions gaining steam are those in which corporate reorganization is needed in the face of the economic situation," Amaral added. He expects financial services, agribusiness and education, which have proved resilient to the economic and political turmoil, to produce a stable stream of M&A activity in coming months. Bidders are also eyeing assets in troubled sectors from oil and real estate to construction as valuations sink. "Industrial M&A has been severely impacted, more than any other sector, because it's hard to see a clear time frame for an economic recovery and there's a lot of currency volatility that is getting on the way of operations," said Jose Setti Diaz, an M&A lawyer with Demarest Advogados in São Paulo. While the list of suspended deals grew considerably in recent weeks, advisory work remains intense, forcing investment banks to shuffle bankers from areas with more idle workload, like debt or equity underwriting, to handle more M&A and debt restructuring transactions, said Mauricio Maurano, senior vice president for wholesale banking at Banco do Brasil. For years, proceeds from M&A mandates sourced investment banks with almost half their annual revenues in Brazil. As dealmaking suffered with the country's woes, banks have turned to structured lending and other products to make up for declining advisory fees. They have had little success, in many cases, and many have cut back on staff. Following is a table with Brazil's M&A first-quarter advisory rankings. Advisor Rank Value YOY Number YOY per Change of Change Advisor (%) Deals (%) 1 Grupo BTG Pactual SA $2.779 bln -13 pct 10 6 2 Lazard Ltd $1.340 bln n.a. 2 n.a. 2 Rothschild & Co $1.340 bln -55 pct 2 0 4 Itau Unibanco Holding $515.6 mln -85 pct 7 4 SA 5 Banco Bradesco SA $312.3 mln - 2 n.a. 6 BR Partners Banco do $165.9 mln +535 3 2 Investimento pct 7 Artica Participações $20.0 mln n.a. 3 1 8 Arab Banking Corp. n.a. n.a. 1 0 8 Credit Suisse Group AG n.a. n.a. 3 1 8 Greenhill & Co LLC n.a. n.a. 1 n.a. 8 IGC Partners n.a. n.a. 1 n.a. 8 IMAP n.a. n.a. 2 1 8 Jefferies LLC n.a. n.a. 1 n.a. 8 JPMorgan Chase & Co n.a. n.a. 1 0 8 Moelis & Co n.a. n.a. 2 1 8 Morgan Stanley & Co n.a. n.a. 1 2 8 PJT Partners LP n.a. n.a. 2 0 8 PricewaterhouseCoopers n.a. n.a. 1 2 Subtotal with $3.168 bln -36 pct 33 -8 Financial Advisor Subtotal without $644.8 mln -27 pct 102 -14 Financial Advisor INDUSTRY TOTAL $3.813 bln -34 pct 135 -22 ($1 = 3.5270 Brazilian reais) (Editing by Daniel Flynn and Tom Brown)
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