(Click on for a table on Thomson Reuters’ first-half Brazil M&A rankings in terms of deal value and number of deals)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, July 1 (Reuters) - Bankers dismayed by the small number of merger-and-acquisition closings in Brazil this year expect a turnaround, citing a weak local currency, cheaper assets and cash-flush buyout firms.
Dozens of deals stalled in the first six months of the year because of mounting economic and political turmoil. Still, advisory work remained rather intense in the period, forcing banks to deploy more staff than usual to handle otherwise normal transactions, bankers told Reuters on Wednesday.
Despite the still-murky outlook, government efforts to stabilize Latin America’s largest economy are slowly reigniting investor confidence, bankers said. That, coupled with more attractive prices for takeover targets, should help transform their backlog of work into deal announcements.
“We already knew that this year wouldn’t bring about any easy deals,” said Alessandro Farkuh, head of M&A at Bradesco BBI. “Even with the outlook gradually improving, they’re taking longer to close; we’re spending more time and energy doing so.”
In the year through June 30, companies announced $14.47 billion worth of M&A transactions in Brazil, the lowest in a decade, a Thomson Reuters deal intelligence report showed. The value of deals sank 39 percent from a year earlier, and 65 percent from the last six months of 2014.
Only 117 deals, worth $5.95 billion, were announced during the second quarter, as fallout from the nation’s worst downturn in two decades and a graft scandal afflicting state-controlled oil producer Petróleo Brasileiro SA weighed on sentiment. That total was down from 139 deals announced in the first quarter, valued at about $8.5 billion.
Grupo BTG Pactual SA topped deal value rankings, after working on $7.53 billion worth of transactions in the period. Itaú BBA, the investment-banking unit of Itaú Unibanco Holding SA, topped the number of deal rankings with 17 transactions in the first six months.
The allure of cheaper takeover targets will soon begin to outweigh risks for some buyers as the gap between bids and asking prices narrows, said Rodrigo Mello, managing director with Greenhill & Co in Brazil. Price convergence should take place as a declining Brazilian currency helps trim the value of local assets in U.S. dollar terms, he said.
Multinational companies and other strategic players are brushing caution aside and seeking greater exposure to Brazil, some in search of a specific asset, others to tap the country’s need for infrastructure.
Some transactions that may close in coming months include HSBC Holdings Plc’s $4 billion sale of its Brazilian unit and builder OAS SA’s sale of a stake in infrastructure company Invepar, sources recently told Reuters.
Hygiene goods maker Hypermarcas SA is considering selling or spinning off its diaper unit. Petrobras, as the state oil firm is known, wants to sell $3 billion in biofuels and other non-core assets this year.
Most M&A bankers are pinning their hopes on financial sponsors like private equity firms and sovereign wealth funds, which are on the prowl to take advantage of lower asset valuations. Last year, private equity firms raised a record $5.6 billion for new Brazil investments.
Brazil’s decade-long boom has fizzled after luring hundreds of billions of dollars in investments. Still, the country remains Latin America’s largest recipient of private equity money, accounting for 58 percent of the value of buyouts and 46 percent of regional deals.
“For strategic and long-term financial investors, Brazil’s economy is still very large and very relevant to their business plans and, therefore, their appetite to do deals in the country remains high,” said Antonio Pereira, head of Brazil investment banking at Goldman Sachs Group Inc.
Deals may focus on sectors and companies that are resilient to a recession and whose management is savvy enough to ride out tough cycles, said David Mussafer, managing partner at Advent International Corp, which last year raised the largest-ever Latin American buyout fund at $2.1 billion.
Buyout firms are seeking opportunities in some of the most resilient sectors in the economy like healthcare, financial services and education, BTG Pactual partner Bruno Amaral said.
Likewise, more restructuring deals are expected as a looming recession forces companies to renegotiate debts. Banks and law firms including Itaú BBA, Rothschild and Alvarez & Marsal Holdings LLC are winning mandates to oversee more of those processes.
Advisory fees and banker rosters may stay relatively stable even as some banks like Barclays Plc or Deutsche Bank AG trim their Brazil-based investment banking staff.
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, capital markets data firm Dealogic said. According to Thomson Reuters and consulting firm Freeman & Co, BTG Pactual and Banco Santander Brasil SA’s investment-banking unit collected a combined 30 percent of imputed fees in the period. (Editing by David Gregorio)