April 13, 2016 / 9:02 AM / 2 years ago

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
    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.
    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
 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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