July 5, 2017 / 12:02 PM / a year ago

Brazil's turmoil to boost M&A pipeline after a quiet quarter, bankers say

    By Tatiana Bautzer and Guillermo Parra-Bernal
    SAO PAULO, July 5 (Reuters) - Escalating political turmoil
and a widening graft scandal are driving more Brazilian
companies to sell businesses, promising a strong pipeline of
mergers and acquisitions after dealmaking hit its slowest pace
in a year in the second quarter, bankers said.
    While stricter legal scrutiny related to the corruption
scandal helped slow second-quarter M&A, bankers said funds and
multinational firms were still seeking Brazilian assets. Despite
economic and political headwinds, merger activity could be
reignited by falling borrowing costs and an increasingly stable
    Pressure from creditors could also speed up asset sales by
companies restructuring almost 180 billion reais ($56 billion)
of debt, bankers said. 
    "M&A is relatively resilient to the macroeconomic and 
political environment as strategic players seek opportunities
with long-term potential," said Patricia Moraes, head of Brazil
banking for JPMorgan Chase & Co, which topped Thomson Reuters
local advisory rankings last quarter.
    Uncertainty surrounding the timeframe for an economic
recovery from Brazil's worst recession on record, as well as
concerns about the stability of President Michel Temer's
administration, have deterred some buyers and sellers from
committing to deals.
    Companies announced $7.052 billion worth of Brazil-related
mergers last quarter, down 76 percent from the prior quarter,
the rankings showed. A year earlier, when tougher due diligence
procedures were implemented, announced M&A deals totaled $6.861
    Last quarter, the number of announced deals fell to 132 from
141 in the prior three months and 135 a year earlier.
    Brazilian markets tanked in mid-May after members of the
billionaire Batista family accused Temer of seeking to obstruct
the massive corruption probe known as Operation Car Wash. The
market turmoil compounded the impact of Brazil's recession,
keeping buyers and sellers at odds over valuations.
    Temer has called a corruption charge filed against him by
Brazil's top prosecutor a "fiction" as he faces possible removal
from office.    
    Fallout from Operation Car Wash has led to increased due
diligence concerning companies ensnared in the scandal, such as
building group Odebrecht SA. Usual timeframes for such
proceedings have doubled over the past year, to up to six
    "Deals are going though an adjustment," said Alessandro
Farkuh, head of M&A for Banco Bradesco BBI SA. "There's a lot of
work but, because of the country's situation, M&A negotiations
are taking place in an unusual way." 
    More assets are on the block as companies seek to cut debt
or improve their capital and tax structures, said Eduardo Miras,
co-head of Brazil investment banking at Morgan Stanley & Co,
Brazil's No. 1 M&A bank this year. 
    "Some companies are being forced to sell," Miras said.
"Opportunistic buyers and strategic players with a long-term
view find themselves with a flurry of good Brazilian assets."
    Car Wash-related M&A deals include J&F Investimentos SA's
planned sale of a dairy producer and the maker of the popular
Havaianas flip flops, Alpargatas. Members of the Batista family,
which controls J&F, admitted to bribing 1,893
    Roderick Greenlees, global head of investment banking at
Itaú BBA SA, said he expected deals to pick up in the third and
fourth quarters amid growing interest from multinational firms
and buyout funds, which are more likely to meet buyers' prices
for attractive companies.
    "Some premium assets are being sold because of the current
situation, which in general keeps us excited about the dealflow
ahead," Greenlees said.
    JPMorgan and Morgan Stanley topped value rankings for the
second quarter and the first half, respectively. JPMorgan worked
on Itaú's $2 billion purchase of a minority stake in brokerage
XP Investimentos SA.
    Itaú BBA led the rankings for the number of deals after
working on seven transactions last quarter and 18 this year.
    In the first six months, the total of 273 Brazilian
M&A-related transactions was worth $36.177 billion, more than
three times the amount recorded in the same period of last year,
the data showed.  
    For years, investment banks have derived nearly half of
their annual Brazil revenues from M&A advisory. As dealmaking
suffers, banks have turned to structured lending, transactional
banking or, in some cases, securities trading.
    Following is a table with Brazil M&A ranking for the second
quarter and the first six months. Numbers are expressed in U.S.
dollars, unless specified.
 FIRST-H         FIRM           DEALS      OF DEALS  SECOND-
   ALF                           (Jan.      (Jan.    QUARTER
  2017                        1-June 30)    1-June    2017
    1      Morgan Stanley &   $22.237 bln     5       n.a.
    2     Banco Bradesco BBI  $21.500 bln     9         7
    3     Banco BTG Pactual   $3.705 bln      11        4
    4     Banco Itaú BBA SA   $3.070 bln      18        2
    5      JPMorgan Chase &   $2.598 bln      3         1
    6       Goldman Sachs     $2.058 bln      3         5
              Group Inc                              
    7       Citigroup Inc     $1.656 bln      1       n.a.
    8      Rothschild & Co    $1.423 bln      6         3
    9       Credit Suisse     $1.281 bln      2        10
               Group AG                              
   10      Bank of America    $517.9 mln      4        10
            Merrill Lynch                            
            SUBTOTAL WITH     $33.942 bln     79        -
          FINANCIAL ADVISER                          
            INDUSTRY TOTAL    $36.177 bln    273        -
    ($1 = 3.3000 reais)

 (Editing by Phil Berlowitz)
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