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October 2, 2012 8:45 pm
Brazil’s mergers and acquisitions market has shown remarkable resilience this year, considering the eurozone crisis, like the villain at the end of a low-grade horror movie, has continually resurfaced to crush animal spirits.
While volumes were a far cry from the boom times of 2010, deal flows were respectable, helped along by a rush to complete transactions ahead of antitrust rules introduced this year. Brazil’s main investment themes – the need for infrastructure, the growing consumer dollar among the lower middle classes, the consolidation of the financial sector, and the growth of the oil and gas industry – featured strongly.
“The main drivers supporting the market for mergers and acquisitions in Brazil are still intact,” says Jean-Marc Etlin, chief executive officer of Itáu BBA Investment Bank.
The market’s relative buoyancy in the face of one of the worst economic downturns in recent years underlines the strength of Brazilian companies and the level of global interest in Latin America’s largest economy.
Overall volumes for mergers and acquisitions in Brazil reached $49.8bn over 627 deals in the first nine months of this year, according to Dealogic, the data provider. This was 25 per cent lower than the same period last year, when volume amounted to $66bn over 471 deals and well below 2010’s record of more than $80bn in deals in the first nine months. But it was comparable with the last downturn in 2009.
“Finance was the most targeted sector in Brazil in the first nine months of 2012, with 21 deals worth $8.5bn,” reports Dealogic.
It says this represents an increase in volume of 28 per cent from the same period in 2011, and the second highest volume and highest activity on record for the sector.
The biggest finance deal, which was also the biggest transaction of the year so far, was Itáu Unibanco’s $6.8bn acquisition of the 50 per cent stake it did not already own in Redecard, the card payment processor. Second in line was energy group Cosan’s $2.9bn bid for BG Group’s 59 per cent stake in Comgás, a gas provider.
US companies were the biggest acquirers, snapping up assets worth $3.42bn, Dealogic says. In spite of earlier Brazilian concerns about growing direct investment by Chinese state-owned entities in the country, Chinese companies did not figure in the chart of top 10 investing countries.
The year was also not as bad as it first appeared for bankers’ fees. Revenue for Brazilian M&A was $270m, a fall of only 8 per cent compared with 2011. Indeed, as a share of the investment banking wallet, revenue from M&A represented 48 per cent in the first nine months of this year compared with 38 per cent the year before.
“BTG Pactual led the Brazil M&A revenue ranking with $78m in the first nine months of 2012, followed by Credit Suisse with $34m and Itáu BBA with $29m,” says Dealogic.
The relatively modest dip in revenue in spite of the tough conditions is good news for the industry, particularly for the large number of banks that beefed up staff in the boom years.
There has been concern that newcomers may have to cut staff or even pull out of the country if the downturn in markets continues indefinitely. During the good times, many paid salaries above those of London and New York in the competition for scarce talent. Retrenchment may still happen among smaller operators – revenue remains concentrated among the traditional market leaders – but the pie is large and expected to grow when better times return.
“All the major banks are past figuring out whether Brazil is important or not,” said one banker with an international institution in São Paulo.
A key driver for the market is the presence of domestic and international private equity firms in greater numbers and with ever larger war chests. Last year, the industry set a record for fundraising and it is now looking to take advantage of the lull in valuations to put that to work.
Luca Molinari, managing director at Warburg Pincus in São Paulo, says: “We look to make an absolute return of a scale in which the percentage return and the multiple of invested capital are in line with the risk we have taken.”
Central to investors’ belief in Brazil remains the idea that the country is undergoing structural reform towards more equal distribution of wealth.
The story of the Brazilian boom has been more about the increasing prosperity of lower income groups than breakneck headline economic growth, as in China and India. “Although over the past few quarters there has been a slowdown in general economic activity, we think the trend of rising income among the general population is structural,” says Mr Molinari.
Even on the economy, the general mood is improving in the investment banking industry. If Europe can contain its occasional convulsions, many believe Brazil will recover its growth trajectory next year, leading to a resurgence in deal volumes.
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