(Valor Econômico) Transaction Profiles Begin to Shift in the Second Half, Driven by Rival Company Consolidations
By Mônica Scaramuzzo and Fernanda Guimarães — São Paulo
09/13/2023 5:03 AM | Updated 18 hours ago
The pipeline for mergers and acquisitions (M&A) operations has started to unblock after a slower period for deal closures due to uncertainties surrounding the new government and high interest rates impacting long-term financing. Transactions involving asset sales by indebted companies, which dominated the early months of the year, are now sharing the stage with typical consolidation deals, as companies begin to refocus on growth strategies.
The renewed talks between Cobasi and Petz for a merger, as reported earlier by Valor, illustrate how companies are now seeking consolidation as the macroeconomic environment shows signs of recovery. Sources revealed that negotiations are still in the early stages, with each family discussing their contributions to the newly formed company through a share exchange.
A major transaction announced last week was Nestlé’s acquisition of Kopenhagen, strengthening its position in Brazil as foreign strategic investors increasingly focus on the country.
However, despite what some are describing as “healthier M&A discussions” gaining momentum in recent weeks, the market still includes companies with heavy debt burdens offloading assets to improve their balance sheets. For instance, Natura announced last week that it is evaluating the sale of The Body Shop. Earlier this year, the beauty and cosmetics giant sold Aesop for $2.5 billion to L’Oréal, reducing its leverage.
Sources close to Natura indicated that selling The Body Shop would allow the company to return to its roots before pursuing further growth. Analysts speculate that the company might retain only its Latin American Avon assets, divesting the rest of the brand. Another company moving to reduce leverage is Marfrig, which sold 16 facilities to competitor Minerva Foods.
Industry insiders note that in both cases, companies are “retracing their steps” after leveraging themselves for growth via acquisitions.
Nevertheless, the consolidation of businesses by both domestic and foreign groups targeting Brazil is beginning to stir the market in the second half of the year. “Several conversations that were ‘on hold’ at the end of last year and the beginning of this year have started to progress, particularly regarding strategic agendas. We now have a lower-risk environment, which has revived many of these talks,” said Diogo Aragão, head of M&A for Bank of America (BofA) in Brazil.
According to Aragão, results will materialize between the end of the year and the first quarter of 2024. “The value creation for companies is greater when there’s a business combination,” he said, emphasizing that, in some cases, mergers are a better strategy for growth than organic expansion.
Current discussions are more rational in terms of business valuation, notes the BofA executive. Asset prices are being adjusted, particularly for publicly traded companies whose stocks are undervalued.
Eduardo Miras, head of Citi’s investment banking division, explained that consolidation is always a driving force in the M&A industry, along with portfolio rebalancing, which can involve asset sales or seeking minority partners. Both types of discussions are present in ongoing transactions, he said. Citi’s M&A head, Antonio Coutinho, highlighted a recent shift: increasing interest from foreign strategic investors in Brazilian assets. “In 2020 and 2021, we saw a lot of domestic consolidation. Now, we’re seeing cross-border transactions,” he said.
Miras emphasized that foreign investors are identifying opportunities in Brazil, particularly as other emerging markets face greater challenges, making the country stand out. However, he also noted that local M&A activity remains below historical averages and that its recovery will be gradual, with current mandates likely concluding only in 2024.
Miras pointed to the recovery of the debt market as a crucial indicator, enabling M&A discussions to stay on track. Citi executives added that, similar to earlier this year, deals are taking longer to close, and the failure rate remains high.
“There were significant uncertainties earlier in the year, including interest rates, inflation, and fiscal concerns. Companies held back on accelerating their plans. Now, the frequency of discussions has increased significantly,” said José Paulo Scheliga, president of Oriz Partners.
Scheliga noted that since the end of the first half, the pipeline has featured “healthier M&As,” although some deals are waiting for the reopening of the IPO window to secure financing for acquisitions.
Some transactions involve companies adjusting their balance sheets, including those in bankruptcy recovery, selling assets to gain liquidity. On the other hand, consolidation-driven transactions are beginning to reemerge, Scheliga said.
The improving backdrop has been evident since April, highlighted Daniel Wainstein, a partner at Seneca Evercore. He noted increased optimism following a first quarter marked by one of Brazil’s worst credit crises. Since then, Wainstein has encouraged clients to resume processes.
“Since April, the environment in Brazil has changed drastically. Many frozen deals have been revived,” he said. Wainstein anticipates stronger M&A volumes in the second half of the year and robust numbers for the first half of 2024, estimating $30 billion in deals—above the historical semiannual average of $20 billion to $25 billion.
At Fortezza, ongoing deals include companies adjusting their balance sheets. Denis Morante, a partner at the consultancy, mentioned cases of operationally sound companies with high debt requiring restructuring, leading to mandates for full company sales. Despite this, Morante views the outlook for 2024 as more optimistic. “I’m starting to see a more favorable environment for deals to move forward.”
When contacted, Marfrig clarified that its sale of 16 processing facilities to Minerva Foods at the end of August was a strategic move to focus on high-value-added products (branded and processed goods). “This shift began in 2018 with the acquisition of National Beef,” the company stated.
Published on: https://valor.globo.com/financas/noticia/2023/09/13/com-melhora-da-economia-fila-de-m-a-destrava.ghtml
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