July 10, 2019 / 2:23 PM / 9 days ago

REFILE-Privatization to dominate capital markets, M&A in Brazil this year

 (Adds Morgan Stanley executive's full title in paragraph 9)
    By Tatiana Bautzer and Carolina Mandl
    SAO PAULO, July 10 (Reuters) - The sale of state-owned
assets is expected to drive M&A transactions and share offerings
volume in Brazil in the second half of the year, bankers and
investors said, after a slower-than-expected first half.
    As court injunctions delayed asset sales by oil company
Petroleo Brasileiro SA and discussion of pension
reform dragged on in Congress, the volume of mergers and
acquisitions in the first half of the year fell 19% to $20.8
billion, according to Refinitiv data.
    But state-controlled companies faced less hurdles to selling
stakes in companies already listed, and the volume of share
offerings rose 45% in the first half to 8.6 billion reais ($2.25
billion). It was the best first half of the year since 2013. 
    After Brazil's Supreme Court finally cleared the way for
Brazil's largest deal this year, the sale by Petrobras of gas
pipeline network TAG to France's Engie SA for $8.6
billion, banks expect the volume of privatization-related M&A to
grow. The next one on the block is fuel distribution unit
Petrobras Distribuidora SA, which will be privatized 
through a share offering by the end of the month.
    "We are expecting a new round of infrastructure auctions
that may include licenses to operate airports, railroads and
highways", said Hans Lin, head of investment banking in Brazil
at Bank of America.
    The approval of pension reform by Congress is expected to
unlock strategic moves by Brazilian companies that were waiting
for a clearer outlook for the economy.
    "We expect private M&A activity to rise more sharply next
year, as the transactions take around nine months between
initial talks and announcements," said Eduardo Miras, head of
investment banking in Brazil at Citigroup. Citi is leading the
M&A advisory ranking so far this year with five deals announced,
totaling $10.2 billion.
    One of the few recent private deals announced is the
proposed merger between food processors BRF SA and
Marfrig Global Foods SA. Miras expects more deals on
the power industry in the second half. 
    Alessandro Zema, country head of Morgan Stanley in Brazil
and also head of its investment banking unit, also noticed more
activity in private mandates recently, and expects new deals in
retail, following recent acquisitions of e-commerce Netshoes and
appliance retailer Via Varejo SA. 
    "Industries more directly affected by the recession, such as
retail and consumer products, also had lower M&A activity," Zema
said. "We believe this is going to change with a better outlook
for the economy." 
    Zema also pointed out that some Brazilian companies in good
shape are looking for targets outside the country as a way to
balance risks. Last month, Natura Cosmeticos SA
acquired Avon Products Inc..
    Another driver for future M&A activity is the fast growth of
start-ups in the country, which has become a main target of
investors such as Japan's Softbank. Softbank has raised
a $5 billion fund for Latin America. 
     
    EQUITIES
    Much of the growth in share offerings' volume was led by
state-controlled banks Caixa Economica Federal and Banco do
Brasil, which sold their stakes in Petrobras and power company
Neoenergia SA, respectively. Caixa also sold a stake
in the reinsurer IRB Brasil Resseguros SA, owned by a
fund managed by the bank.
   Many follow-ons in the pipeline for the coming months also
involve divestments by the government or state-owned companies,
totaling at least 30 billion reais. This list includes
follow-ons by Banco do Brasil, Alupar Investimento SA
, Petrobras Distribuidora SA and IRB,
besides an IPO by insurance company Caixa Seguridade.   
    Despite high volumes in share offerings, only two companies
dared an initial public offering so far: sporting goods retailer
Centauro and Neoenergia SA.
    "IPO´s market would resume on a relevant scale once foreign
equity investors massively return to Brazil," said Cristiano
Guimaraes, Itau BBA's managing director. "Their return will
largely depend on the approval of a significant pension reform."

    TABLES
    
    M&A drops 19%
    
    The value of mergers and acquisitions involving Brazilian
targets fell 19% in the first half of 2019 from the same period
in 2018 to $20.8 billion, according to Refinitiv data. 
    Following are the investment banks with the most advisory
work, by total deal value and by number of mandates:
    
    
 Rank         Financial advisor  Deals value   Number of
                                 ($ million)   deals
 1            Citi               10,279        5
 2            Morgan Stanley     8,682         2
 3            Rotschild & Co     3,308         8
 4            Banco BTG Pactual  2,780         15
              SA                               
 5            Itau Unibanco      2,565         10
 6            Bank of America    1,847         3
 7            Goldman Sachs      1,498         3
 8            Riza Capital       1,261         2
 9            BR Partners        1,097         3
 10           TD Securities Inc  1,025         1
 Industry                        20,881        247
 Total                                         
 
    
    Equity offerings up 45%
    
    The value of Brazilian equity offerings rose 45% in the
first half of 2019 from the same period in 2018 to $8.5 billion.
Following are the investment banks with most bookrunning work,
by proceeds and number of issues:      
    
 Rank       Book runner      Proceeds     Number of
                             ($ million)  issues
 1          Bank of America  970          8
 2          Itau Unibanco    808          9
 3          Banco BTG        793          10
            Pactual                       
 4          JPMorgan         667          5
 5          Morgan Stanley   639          5
 Industry                    8,693        17
 total                                    
 
 ($1 = 3.8168 reais)

 (Reporting by Tatiana Bautzer and Carolina Mandl; editing by
Jonathan Oatis)
  
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