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Uncertainty Limits Mergers and Acquisitions in Brazil

Writer's picture: Seneca Evercore | NotíciasSeneca Evercore | Notícias

(Valor Econômico) Concerns about taxes, exchange rates, and the cost of capital complicate pricing agreements.


Fernanda Guimarães



Internal instability and increased uncertainty have slowed the pace of mergers and acquisitions (M&As) in Brazil, potentially marking another year of decline in local market transactions. As of July 17, according to data from Dealogic, a consultancy that tracks global market activity, the number of transactions reached 350, a 19% year-on-year decrease.


As of the 17th of the month, according to data from Dealogic, a consultancy that collects global market data, the number of transactions reached 350, a 19% decrease compared to the previous year.


On the other hand, with heavyweight deals like the recent merger of Dasa and Amil hospitals, the financial volume went in the opposite direction, reaching R$90.7 billion during the same period, a 29% increase year-on-year.


According to sources consulted by Valor, concerns about tax reform, for instance, are holding back investors, with both financial and strategic players awaiting clarity before reigniting negotiations. Uncertainty complicates price agreements on assets, delaying transaction closures, investment bankers say.


Despite the challenges, Roderick Greenlees, Global Head of Itaú BBA, remains optimistic about M&A, citing significant transactions across various economic sectors. "We see consolidation moves aimed at cost rationalization," the executive said.


Among sectoral consolidations, Arezzo joined forces with Soma in one of the year's major deals. Similar strategies were observed with Petz and Cobasi in the pet retail sector, and Enauta and 3R among junior oil companies. The energy sector, one of the most active this year, saw major portfolio recycling transactions, such as Eletrobras selling its thermal plants to Âmbar, part of the J&F group. Additionally, the control of AES was sold to Auren. These deals significantly increased average ticket sizes, supporting the financial growth seen this year.


Greenlees notes that Itaú BBA’s transaction pipeline remains strong and growing but acknowledges that recent political noise from Brasília has created uncertainty, potentially delaying some deal closures. According to him, the bank’s increased activity also reflects a growing market share, particularly in middle-market transactions, thanks to a newly established area focusing on medium-sized deals previously overlooked by Itaú's investment banking unit.


Diogo Aragão, Head of M&A at Bank of America (BofA) in Brazil, confirms that mandates continue to be secured but questions whether the pace can be sustained in the second half of the year, given current uncertainties, including the upcoming U.S. elections. Should mandate inflows slow in the latter half, Aragão warns of a potential gap in announced deals by early 2025, due to the time required to mature transactions. He notes that many of the major deals closed recently were conceived years ago.


Currency volatility is another obstacle for M&A investors, Aragão adds. "M&A investors take a long-term view and are not concerned about the dollar's current value, but volatility is a significant disruption."

Aragão also highlights how negative market sentiment indirectly impacts M&A negotiations. "The M&A market is less affected by negative news flow, but at a certain point, it becomes harder to disassociate," he explains. A weak stock market and poor performance by listed companies reduce M&A's price references, further stalling deals.


According to Daniel Wainstein, partner at Seneca Evercore, the increased noise has affected deal closures, as reflected in the data. "Volatility and unmet expectations create uncertainty for investors and strategic buyers, who seek better visibility regarding growth, inflation, interest rates, and exchange rates before concluding transactions," he says. While this environment does not deter investors from pursuing significant deals, it delays the process, evident in the current figures.


Wainstein points out that this year's transaction volume is the lowest in five years, while financial growth reflects a few large transactions. "The current volume is primarily supported by a handful of significant deals in energy and natural resources, particularly in oil exploration and power generation," he says.


The decline in cross-border transactions is another negative signal for the market, Wainstein notes. Last year, foreign buyers accounted for 64% of deals; this year, that share has dropped to 9%. "Mixed messages and poor communication are scaring investors, with international players being the first to pull back," he explains.


Renata Simón, an M&A and corporate partner at VBSO Advogados, describes a challenging environment with stalled negotiations due to uncertainty. "The M&A market in Brazil has largely frozen because of doubts over whether the government can control public finances. The administration has yet to show a commitment to curbing public spending, raising concerns about meeting fiscal targets," she says.


Simón also attributes the weaker M&A activity to the reduced presence of private equity funds, which acquire stakes in companies. This has contributed to the nearly three-year drought in IPOs on the Brazilian stock exchange.


Published in Valor Econômico on July 1, 2024.

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